[Federal Register Volume 85, Number 5 (Wednesday, January 8, 2020)]
[Proposed Rules]
[Pages 952-1016]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28075]



[[Page 951]]

Vol. 85

Wednesday,

No. 5

January 8, 2020

Part II





Commodity Futures Trading Commission





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17 CFR Part 23





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

  Federal Register / Vol. 85 , No. 5 / Wednesday, January 8, 2020 / 
Proposed Rules  

[[Page 952]]


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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: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is publishing for public comment a proposed rule (``Proposed 
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''). Specifically, the Proposed 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 Commission is proposing a risk-based approach that, 
consistent with section 2(i) 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, would advance the goals of the Dodd-Frank Act's swap 
reform, while fostering greater liquidity and competitive markets, 
promoting enhanced regulatory cooperation, and advancing the global 
harmonization of swap regulation.

DATES: Comments must be received on or before March 9, 2020.

ADDRESSES: You may submit comments, identified by RIN 3038-AE84, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish for the Commission to 
consider information that is exempt from disclosure under the Freedom 
of Information Act (``FOIA''),\1\ a petition for confidential treatment 
of the exempt information may be submitted according to the procedures 
set forth in Sec.  145.9 of the Commission's regulations.\2\
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    \1\ 5 U.S.C. 552.
    \2\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse, or remove any or all of 
your submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
FOIA.

FOR FURTHER INFORMATION CONTACT: Joshua Sterling, Director, (202) 418-
6056, [email protected]; Frank Fisanich, Chief Counsel, (202) 418-
5949, [email protected]; Amanda Olear, Associate Director, (202) 418-
5283, [email protected]; Rajal Patel, Associate Director, 202-418-5261, 
[email protected]; Lauren Bennett, Special Counsel, 202-418-5290, 
[email protected]; Jacob Chachkin, Special Counsel, (202) 418-5496, 
[email protected]; Pamela Geraghty, Special Counsel, 202-418-5634, 
[email protected]; or Owen Kopon, Special Counsel, [email protected], 
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. Global Regulatory and Market Structure
    C. Interpretation of CEA Section 2(i)
    1. Statutory Analysis
    2. Principles of International Comity
    D. Proposed Rule
II. Key Definitions
    A. U.S. Person, Non-U.S. Person, and United States
    B. Guarantee
    C. Significant Risk Subsidiary, Significant Subsidiary, 
Subsidiary, Parent Entity, and U.S. GAAP
    1. Non-U.S. Persons With U.S. Parent Entities
    2. Preliminary Definitions
    3. Significant Risk Subsidiaries
    4. Exclusions From the Definition of SRS
    D. Foreign Branch and Swap Conducted Through a Foreign Branch
    E. Swap Entity, U.S. Swap Entity, and Non-U.S. Swap Entity
    F. U.S. Branch and Swap Conducted Through a U.S. Branch
    G. Foreign-Based Swap and Foreign Counterparty
    H. Request for Comment
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. Swaps Subject to a Guarantee
    C. Aggregation Requirement
    D. Certain Exchange-Traded and Cleared Swaps
    E. Request for Comment
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. Swap Positions Subject to a Guarantee
    C. Attribution Requirement
    D. Certain Exchange-Traded and Cleared Swaps
    E. Request for Comment
V. ANE Transactions
    A. Background and Proposed Approach
    B. Request for Comment
VI. Proposed 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
    4. Request for Comment
    B. Proposed Exceptions
    1. Exchange-Traded Exception
    2. Foreign Swap Group C Exception
    3. Non-U.S. Swap Entity Group B Exception
    4. Foreign Branch Group B Exception
    5. Request for Comment
    C. Substituted Compliance
    1. Proposed Substituted Compliance Framework for the Group A 
Requirements
    2. Proposed Substituted Compliance Framework for the Group B 
Requirements
    3. Request for Comment
    D. Comparability Determinations
    1. Standard of Review

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    2. Eligibility Requirements
    3. Submission Requirements
    4. Request for Comment
VII. Recordkeeping
VIII. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    1. Assessment Costs
    2. Cross-Border Application of the SD Registration Threshold
    3. Cross-Border Application of the MSP Registration Thresholds
    4. Monitoring Costs
    5. Registration Costs
    6. Programmatic Costs
    7. Proposed Exceptions From Group B and Group C Requirements, 
Availability of Substituted Compliance, and Comparability 
Determinations
    8. Recordkeeping
    9. Section 15(a) Factors
    10. Request for Comment
    D. Antitrust Considerations
IX. 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

I. Background

A. Statutory Authority and Prior Commission Action

    In 2010, the Dodd-Frank Act \3\ amended the CEA \4\ 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.\5\
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    \3\ Public Law 111-203, 124 Stat. 1376 (2010).
    \4\ 7 U.S.C. 1 et seq.
    \5\ 7 U.S.C. 2(i).
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    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 Sec.  1.3 of the CFTC's regulations (``Entities Rule'').\6\
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    \6\ 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).
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    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'').\7\ The Guidance included the 
Commission's interpretation of the ``direct and significant'' prong of 
section 2(i) of the CEA.\8\ 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 as 
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.\9\ 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.\10\ The Commission notes that, at the time that the 
Guidance was adopted, it was tasked with regulating a market that grew 
to a global scale without any meaningful regulation in the United 
States or overseas, and that the United States was the first of the G20 
member countries to adopt most of the swap reforms agreed to at the G20 
Pittsburgh Summit in 2009.\11\ 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.
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    \7\ See Interpretive Guidance and Policy Statement Regarding 
Compliance With Certain Swap Regulations, 78 FR 45292 (Jul. 26, 
2013).
    \8\ Id. at 45297-301. The Commission is now restating this 
interpretation, as discussed in section I.C below.
    \9\ Id. at 45297 n.39.
    \10\ See id.
    \11\ 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.
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    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 VI.A).\12\ 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'').\13\ In 
January 2014, the Commission published a request for comment on all 
aspects of the ANE Staff Advisory (``ANE Request for Comment'').\14\
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    \12\ 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.
    \13\ 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. All Commission 
staff letters are available at https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm.
    \14\ 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).
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    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'').\15\ 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 would 
assess whether a foreign jurisdiction's margin requirements are 
comparable.
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    \15\ 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).

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    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'').\16\ 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.\17\ 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 transactions.\18\ 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.\19\
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    \16\ 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).
    \17\ 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.
    \18\ Id. The Commission's external business conduct standards 
are codified in 17 CFR part 23, subpart H (17 CFR 23.400 through 
23.451).
    \19\ Id.
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    The Commission is today withdrawing the 2016 Proposal. The Proposed 
Rule reflects the Commission's current views on the matters addressed 
in the 2016 Proposal, which have evolved since the 2016 Proposal as a 
result of market and regulatory developments in the swap markets and in 
the interest of international comity, as discussed in this release.

B. Global Regulatory and Market Structure

    The regulatory landscape is far different now than it was when the 
Dodd-Frank Act was enacted. Even 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 by regulators in the world's primary 
swap trading jurisdictions to implement the G20 commitments.\20\ 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. 
Regulators have adopted rules regarding matters including central 
clearing, margin requirements for non-centrally cleared derivatives, 
and other risk mitigation requirements.\21\
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    \20\ 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; and 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.
    \21\ 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.
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    Many swaps involve at least one counterparty that is located in the 
United States or another jurisdiction that has adopted comprehensive 
swap regulations.\22\ However, 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. Market fragmentation can reduce the capacity of financial firms 
to serve both domestic and international customers.\23\ The Proposed 
Rule has been designed to support 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, giving due regard to how market practices have evolved 
since the publication of the Guidance is an important consideration. As 
certain market participants may have adjusted their practices to take 
the Guidance into account, the Proposed Rule, if adopted, should cause 
limited additional costs and burdens for these market participants if 
it is adopted, 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.
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    \22\ See, e.g., 2019 FSB Progress Report; and 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.
    \23\ 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.
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    The approach described below is informed by the Commission's 
understanding of current market practices of global financial 
institutions under the Guidance. Driven by 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.\24\ From discussions with market 
participants, the Commission understands that financial groups 
typically prefer to operate their swap dealing businesses and manage 
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.
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    \24\ 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'').
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    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.\25\ 
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

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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, branches, or offices located overseas. 
Swaps are also traded by an entity in one jurisdiction, but booked and 
risk-managed by an affiliate in another jurisdiction. The Proposed 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.
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    \25\ 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.
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C. Interpretation of CEA Section 2(i)

    The Commission's interpretation of CEA section 2(i) in this release 
mirrors the approach that the Commission took in the Guidance. However, 
in light of the passage of time since the publication of the Guidance, 
the Commission is restating its interpretation of section 2(i) of the 
CEA with 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.
1. 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 Foreign Trade Antitrust Improvements 
Act of 1982 (``FTAIA''),\26\ which provides the standard for the cross-
border application of the Sherman Antitrust Act (``Sherman Act'').\27\ 
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.\28\ 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; \29\ and (2) such effect gives rise to a Sherman Act 
claim.\30\ 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.' '' \31\
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    \26\ 15 U.S.C. 6a.
    \27\ 15 U.S.C. 1-7.
    \28\ 15 U.S.C. 6a.
    \29\ 15 U.S.C. 6a(1).
    \30\ 15 U.S.C. 6a(2).
    \31\ 542 U.S. 155, 162 (2004) (emphasis in original).
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    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.\32\ 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.
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    \32\ 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'').
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    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.\33\ Relying upon the Supreme Court's definition of the 
term ``direct'' in the Foreign Sovereign Immunities Act (``FSIA''),\34\ 
the U.S. Court of Appeals for the Ninth Circuit construed the term 
``direct'' in the FTAIA as requiring a ``relationship of logical 
causation,'' \35\ such that ``an effect is `direct' if it follows as an 
immediate consequence of the defendant's activity.'' \36\ 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.'' \37\ After examining the text of the FTAIA 
as well as its history and purpose, the Seventh Circuit found 
persuasive the ``other school of thought [that] has been articulated by 
the Department of Justice's Antitrust Division, which takes the 
position that, for FTAIA purposes, the term `direct' means only `a 
reasonably proximate causal nexus.' '' \38\ The Seventh Circuit 
rejected interpretations of the term ``direct'' that included any 
requirement that the consequences be foreseeable, substantial, or 
immediate.\39\ In 2014, the

[[Page 956]]

U.S. Court of Appeals for the Second Circuit followed the reasoning of 
the Seventh Circuit in the Minn-Chem decision.\40\ That said, the 
Commission would like to make 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. In short, as the discussion below will 
illustrate, the Commission's interpretation of section 2(i) is not 
solely dependent on one's view of the Seventh Circuit's Minn-Chem 
decision, but informed by its overall understanding of the relevant 
legal principles.
---------------------------------------------------------------------------

    \33\ Guidance, 78 FR at 45299.
    \34\ See 28 U.S.C. 1605(a)(2).
    \35\ 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.
    \36\ Id. at 692-3, 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'').
    \37\ Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 857 (7th 
Cir. 2012) (en banc).
    \38\ Id.
    \39\ Id. at 856-57.
    \40\ Lotes Co., Ltd. v. Hon Hai Precision Industry Co., 753 F.3d 
395, 406-08 (2d Cir. 2014).
---------------------------------------------------------------------------

    Other terms in the FTAIA differ from the terms used in section 2(i) 
of the CEA. First, the FTAIA test explicitly requires that the effect 
on U.S. commerce be a ``reasonably foreseeable'' result of the 
conduct,\41\ whereas section 2(i) of the CEA, by contrast, does not 
provide that the effect on U.S. commerce must be foreseeable. Second, 
whereas the FTAIA solely relies on the ``effects'' on U.S. commerce to 
determine cross-border application of the Sherman Act, section 2(i) of 
the CEA refers to both ``effect'' and ``connection.'' ``The FTAIA says 
that the Sherman Act applies to foreign `conduct' with a certain kind 
of harmful domestic effect.'' \42\ Section 2(i), by contrast, applies 
more broadly--not only to particular instances of conduct that have an 
effect on U.S. commerce, but also to activities that have a direct and 
significant ``connection with activities in'' U.S. commerce. Unlike the 
FTAIA, section 2(i) applies the swap provisions of the CEA to 
activities outside the United States that have the requisite connection 
with activities in U.S. commerce, regardless of whether a ``harmful 
domestic effect'' has occurred.
---------------------------------------------------------------------------

    \41\ 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 objective standard: the requisite 
`direct' and `substantial' effect must have been `foreseeable' to an 
objectively reasonable person.'').
    \42\ Hoffman-LaRoche, 452 U.S. at 173.
---------------------------------------------------------------------------

    As the foregoing textual analysis of the relevant statutory 
language indicates, section 2(i) differs from its analogue in the 
antitrust laws. Congress delineated the cross-border scope of the 
Sherman Act in section 6a of the FTAIA as applying to conduct that has 
a ``direct'' and ``substantial'' and ``reasonably foreseeable'' 
``effect'' on U.S. commerce. In section 2(i), on the other hand, 
Congress did not include a requirement that the effects or connections 
of the activities outside the United States be ``reasonably 
foreseeable'' for the Dodd-Frank Act swap provisions to apply. Further, 
Congress included language in section 2(i) to apply the Dodd-Frank Act 
swap provisions in circumstances in which there is a direct and 
significant connection with activities in U.S. commerce, regardless of 
whether there is an effect on U.S. commerce. The different words that 
Congress used in paragraph (1) of section 2(i), as compared to its 
closest statutory analogue in section 6a of the FTAIA, inform the 
Commission in construing the boundaries of its cross-border authority 
over swap activities under the CEA.\43\ Accordingly, the Commission 
believes it is appropriate to interpret section 2(i) such that it 
applies to activities outside the United States in circumstances in 
addition to those that would be reached under the FTAIA standard.
---------------------------------------------------------------------------

    \43\ The provision that ultimately became section 722(d) of the 
Dodd-Frank Act was added during consideration of the legislation in 
the House of Representatives. See 155 Cong. Rec. H14685 (Dec. 10, 
2009). The version of what became Title VII that was reported by the 
House Agriculture Committee and the House Financial Services 
Committee did not include any provision addressing cross-border 
application. See 155 Cong. Rec. H14549 (Dec. 10, 2009). The 
Commission finds it significant that, in adding the cross-border 
provision before final passage, the House did so in terms that, as 
discussed in text, were different from, and broader than, the terms 
used in the analogous provision of the FTAIA.
---------------------------------------------------------------------------

    One of the principal rationales for the Dodd-Frank Act was the need 
for a comprehensive scheme of systemic risk regulation. More 
particularly, a primary purpose of Title VII of the Dodd-Frank Act is 
to address risk to the U.S. financial system created by 
interconnections in the swap market.\44\ Title VII of the Dodd-Frank 
Act gave the Commission new and broad authority to regulate the swap 
market to seek to address and mitigate risks arising from swap 
activities that could adversely affect the resiliency of the financial 
system in the future.
---------------------------------------------------------------------------

    \44\ Cf. 156 Cong. Rec. S5818 (July 14, 2010) (statement of Sen. 
Lincoln) (``In 2008, our Nation's economy was on the brink of 
collapse. America was being held captive by a financial system that 
was so interconnected, so large, and so irresponsible that our 
economy and our way of life were about to be destroyed.''), 
available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-14/pdf/CREC-2010-07-14.pdf; 156 Cong. Rec. S5888 (July 15, 2010) (statement of 
Sen. Shaheen) (``We need to put in place reforms to stop Wall Street 
firms from growing so big and so interconnected that they can 
threaten our entire economy.''), available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf; 156 Cong. 
Rec. S5905 (July 15, 2010) (statement of Sen. Stabenow) (``For too 
long the over-the-counter derivatives market has been unregulated, 
transferring risk between firms and creating a web of fragility in a 
system where entities became too interconnected to fail.''), 
available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf.
---------------------------------------------------------------------------

    In global markets, the source of such risk is not confined to 
activities within U.S. borders. Due to the interconnectedness between 
firms, traders, and markets in the U.S. and abroad, a firm's failure, 
or trading losses overseas, can quickly spill over to the United States 
and affect activities in U.S. commerce and the stability of the U.S. 
financial system. Accordingly, Congress explicitly provided for cross-
border application of Title VII to activities outside the United States 
that pose risks to the U.S. financial system.\45\ Therefore, the 
Commission construes section 2(i) 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. The Commission interprets section 2(i) in a 
manner consistent with the overall goals of the Dodd-Frank Act to 
reduce risks to the resiliency and integrity of the U.S. financial 
system arising from swap market activities.\46\ Consistent with this

[[Page 957]]

overall interpretation, the Commission interprets the term ``direct'' 
in section 2(i) to require a reasonably proximate causal nexus, and not 
to require foreseeability, substantiality, or immediacy.
---------------------------------------------------------------------------

    \45\ The legislative history of the Dodd-Frank Act shows that in 
the fall of 2009, neither the Over-the-Counter Derivatives Markets 
Act of 2009, H.R. 3795, 111th Cong. (1st Sess. 2009), reported by 
the Financial Services Committee chaired by Rep. Barney Frank, nor 
the Derivatives Markets Transparency and Accountability Act of 2009, 
H.R. 977, 111th Cong. (1st Sess. 2009), reported by the Agriculture 
Committee chaired by Rep. Collin Peterson, included a general 
territoriality limitation that would have restricted Commission 
regulation of transactions between two foreign persons located 
outside of the United States. During the House Financial Services 
Committee markup on October 14, 2009, Rep. Spencer Bachus offered an 
amendment that would have restricted the jurisdiction of the 
Commission over swaps between non-U.S. resident persons transacted 
without the use of the mails or any other means or instrumentality 
of interstate commerce. Chairman Frank opposed the amendment, noting 
that there may well be cases where non-U.S. residents are engaging 
in transactions that have an effect on the United States and that 
are insufficiently regulated internationally and that he would not 
want to prevent U.S. regulators from stepping in. Chairman Frank 
expressed his commitment to work with Rep. Bachus going forward, and 
Rep. Bachus withdrew the amendment. See H. Fin. Serv. Comm. Mark Up 
on Discussion Draft of the Over-the-Counter Derivatives Markets Act 
of 2009, 111th Cong., 1st Sess. (Oct. 14, 2009) (statements of Rep. 
Bachus and Rep. Frank), available at http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=231922.
    \46\ The Commission also notes that the Supreme Court has 
indicated that the FTAIA may be interpreted more broadly when the 
government is seeking to protect the public from anticompetitive 
conduct than when a private plaintiff brings suit. See Hoffman-
LaRoche, 452 U.S. at 170 (``A Government plaintiff, unlike a private 
plaintiff, must seek to obtain the relief necessary to protect the 
public from further anticompetitive conduct and to redress 
anticompetitive harm. And a Government plaintiff has legal authority 
broad enough to allow it to carry out its mission.'').
---------------------------------------------------------------------------

    Further, the Commission does not read section 2(i) to require a 
transaction-by-transaction determination that a specific swap outside 
the United States has a direct and significant connection with 
activities in, or effect on, commerce of the United States to apply the 
swap provisions of the CEA to such transaction. Rather, it is the 
connection of swap activities, viewed as a class or in the aggregate, 
to activities in commerce of the United States that must be assessed to 
determine whether application of the CEA swap provisions is 
warranted.\47\
---------------------------------------------------------------------------

    \47\ The Commission believes this interpretation is supported by 
Congress's use of the plural term ``activities'' in CEA section 
2(i), rather than the singular term ``activity.'' The Commission 
believes it is reasonable to interpret the use of the plural term 
``activities'' in section 2(i) to require not that each particular 
activity have the requisite connection with U.S. commerce, but 
rather that such activities in the aggregate, or a class of 
activity, have the requisite nexus with U.S. commerce. This 
interpretation is consistent with the overall objectives of Title 
VII, as described above. Further, the Commission believes that a 
swap-by-swap approach to jurisdiction would be ``too complex to 
prove workable.'' See Hoffman-LaRoche, 542 U.S. at 168.
---------------------------------------------------------------------------

    This conclusion is bolstered by similar interpretations of other 
federal statutes regulating interstate commerce. For example, the 
Supreme Court has long supported a similar ``aggregate effects'' 
approach when analyzing the reach of U.S. authority under the Commerce 
Clause.\48\ For example, the Court phrased the holding in the seminal 
``aggregate effects'' decision, Wickard v. Filburn,\49\ in this way: 
``[The farmer's] decision, when considered in the aggregate along with 
similar decisions of others, would have had a substantial effect on the 
interstate market for wheat.'' \50\ In another relevant decision, 
Gonzales v Raich,\51\ the Court adopted similar reasoning to uphold the 
application of the Controlled Substance Act \52\ to prohibit the 
intrastate use of medical marijuana for medicinal purposes. In Raich, 
the Court held that Congress could regulate purely intrastate activity 
if the failure to do so would ``leave a gaping hole'' in the federal 
regulatory structure. These cases support the Commission's cross-border 
authority over swap activities that as a class, or in the aggregate, 
have a direct and significant connection with activities in, or effect 
on, U.S. commerce--whether or not an individual swap may satisfy the 
statutory standard.\53\
---------------------------------------------------------------------------

    \48\ Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519 
(2012).
    \49\ 317 U.S. 111 (1942).
    \50\ 567 U.S. at 552-53. At issue in Wickard was the regulation 
of a farmer's production and use of wheat even though the wheat was 
``not intended in any part for commerce but wholly for consumption 
on the farm.'' 317 U.S. at 118. The Supreme Court upheld the 
application of the regulation, stating that although the farmer's 
``own contribution to the demand for wheat may be trivial by 
itself,'' the federal regulation could be applied when his 
contribution ``taken together with that of many others similarly 
situated, is far from trivial.'' Id. at 128-29. The Court also 
stated it had ``no doubt that Congress may properly have considered 
that wheat consumed on the farm where grown, if wholly outside the 
scheme of regulation, would have a substantial effect in defeating 
and obstructing its purpose . . . .'' Id.
    \51\ 545 U.S. 1 (2005).
    \52\ 21 U.S.C. 801 et seq.
    \53\ In Sebelius, the Court stated in dicta, ``Where the class 
of activities is regulated, and that class is within the reach of 
federal power, the courts have no power to excise, as trivial, 
individual instances of the class.'' 567 U.S. at 551 (quoting Perez 
v. United States, 402 U.S. 146, 154 (1971)). See also Taylor v. 
U.S.136 S. Ct. 2074, 2079 (2016) (``[A]ctivities . . . that 
``substantially affect'' commerce . . . may be regulated so long as 
they substantially affect interstate commerce in the aggregate, even 
if their individual impact on interstate commerce is minimal.'')
---------------------------------------------------------------------------

2. Principles of International Comity
    Principles of international comity counsel the government in one 
country to act reasonably in exercising its jurisdiction with respect 
to activity that takes place in another country. Statutes should be 
construed to ``avoid unreasonable interference with the sovereign 
authority of other nations.'' \54\ This rule of construction ``reflects 
customary principles of international law'' and ``helps the potentially 
conflicting laws of different nations work together in harmony--a 
harmony particularly needed in today's highly interdependent commercial 
world.'' \55\
---------------------------------------------------------------------------

    \54\ Hoffman-LaRoche, 542 U.S. at 164.
    \55\ Id. at 165.
---------------------------------------------------------------------------

    The Restatement (Third) of Foreign Relations Law of the United 
States,\56\ together with the Restatement (Fourth) of Foreign Relations 
Law of the United States \57\ (collectively, the ``Restatement''), 
provides that a country has jurisdiction to prescribe law with respect 
to ``conduct outside its territory that has or is intended to have 
substantial effect within its territory.'' \58\ The Restatement also 
provides that even where a country has a basis for extraterritorial 
jurisdiction, it should not prescribe law with respect to a person or 
activity in another country when the exercise of such jurisdiction is 
unreasonable.\59\
---------------------------------------------------------------------------

    \56\ Restatement (Third) section 402 cmt. d (1987).
    \57\ Julian Ku, American Law Institute Approves First Portions 
of Restatement on Foreign Relations Law (Fourth), OpinioJuris.com, 
May 22, 2017, http://opiniojuris.org/2017/05/22/american-law-institute-approves-first-portions-of-restatement-on-foreign-relations-law-fourth/; Jennifer Morinigo, U.S. Foreign Relations 
Law, Jurisdiction Approved, ALI Adviser, May 22, 2017, http://www.thealiadviser.org/us-foreign-relations-law/jurisdiction-approved/; Restatement (Fourth) of Foreign Relations Law Intro. 
(Westlaw 2018) (explaining that ``this is only a partial revision'' 
of the Third Restatement).
    \58\ Restatement (Fourth) section 409 (Westlaw 2018).
    \59\ Restatement (Fourth) section 405 cmt. a (Westlaw 2018); see 
id. at section 407 Reporters' Note 3 (``Reasonableness, in the sense 
of showing a genuine connection, is an important touchstone for 
determining whether an exercise of jurisdiction is permissible under 
international law.'').
---------------------------------------------------------------------------

    As a general matter, the Fourth Restatement has indicated that the 
concept of reasonableness as it relates to foreign relations law is ``a 
principle of statutory interpretation'' that ``operates in conjunction 
with other principles of statutory interpretation.'' \60\ More 
specifically, the Fourth Restatement characterizes the inquiry into the 
reasonableness of exercising extraterritorial jurisdiction as an 
examination into whether ``a genuine connection exists between the 
state seeking to regulate and the persons, property, or conduct being 
regulated.'' \61\ The Restatement explicitly indicates that the 
``genuine connection'' between the state and the person, property, or 
conduct to be regulated can derive from the effects of the particular 
conduct or activities in question.\62\
---------------------------------------------------------------------------

    \60\ Id. at section 405 cmt. a.
    \61\ Id. at section 407 cmt. a; see id. at section 407 
Reporters' Note 3.
    \62\ Id. at section 407.
---------------------------------------------------------------------------

    Consistent with the Restatement, the Commission has carefully 
considered, among other things, the level of the foreign jurisdiction's 
supervisory interests over the subject activity and the extent to which 
the activity takes place within the foreign territory. In doing so, the 
Commission has strived to minimize conflicts with the laws of other 
jurisdictions while seeking, pursuant to 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 believes the Proposed Rule strikes an appropriate 
balance between these competing factors to ensure that the Commission 
can discharge its responsibilities to protect the U.S. markets, market 
participants, and financial system,

[[Page 958]]

consistent with international comity, as set forth in the Restatement. 
Of particular relevance is the Commission's approach to substituted 
compliance in the Proposed Rule, which would mitigate burdens 
associated with potentially conflicting foreign laws and regulations in 
light of the supervisory interests of foreign regulators in entities 
domiciled and operating in their own jurisdictions.

D. Proposed Rule

    The Proposed Rule addresses which cross-border swaps or swap 
positions a person would need to consider when determining whether it 
needs to register with the Commission as an SD or MSP, as well as 
related classifications of swap market participants and swaps (e.g., 
U.S. person, foreign branch, swap conducted through a foreign 
branch).\63\ Further, the Commission is proposing exceptions from, and 
a substituted compliance process for, certain regulations applicable to 
registered SDs and MSPs. The Proposed Rule also would create a 
framework for comparability determinations for such regulations that 
emphasizes a holistic, outcomes-based approach that is grounded in 
principles of international comity. Finally, the Proposed Rule would 
require SDs and MSPs to create a record of their compliance with the 
Proposed Rule and to retain such records in accordance with Sec.  
23.203.\64\ If adopted, the Proposed Rule would supersede the 
Commission's policy views with respect to its interpretation of section 
2(i) of the CEA and the covered swap provisions, as set forth in the 
Guidance.\65\ The Proposed Rule would not supersede the Commission's 
policy views as stated in the Guidance or elsewhere with respect to any 
other matters.
---------------------------------------------------------------------------

    \63\ There were no MSPs registered with the Commission as of the 
date of the Proposed Rule.
    \64\ See Proposed Sec.  23.23(h).
    \65\ The Commission notes that, if adopted, the Proposed Rule 
would also cause the Commission's Title VII requirements addressed 
in section VI of this release to become ``Addressed Transaction-
Level Requirements'' under the terms of CFTC Staff Letter No. 17-36, 
Extension of No-Action Relief: Transaction-Level Requirements for 
Non-U.S. Swap Dealers (July 25, 2017), available at https://www.cftc.gov/csl/17-36/download, such that relief for such 
requirements would no longer be available under that letter. The 
treatment of the Commission's other Title VII Requirements under the 
letter would not be affected by the finalization of the Proposed 
Rule.
---------------------------------------------------------------------------

    The Proposed Rule takes into account the Commission's experience 
implementing the Dodd-Frank Act reforms, including its experience with 
the Guidance and the Cross-Border Margin Rule, comments submitted in 
connection with the ANE Request for Comment, as well as discussions 
that the Commission and its staff have had with market participants, 
other domestic \66\ and foreign regulators, and other interested 
parties. It is essential that a cross-border framework recognize the 
global nature of the swap market and the supervisory interests of 
foreign regulators with respect to entities and transactions covered by 
the Commission's swap regime.\67\ In determining the extent to which 
the Dodd-Frank Act swap provisions addressed by the Proposed Rule would 
apply to activities outside the United States, the Commission has 
strived to protect U.S. interests as contemplated by Congress in Title 
VII, and minimize conflicts with the laws of other jurisdictions. The 
Commission has carefully considered, among other things, the level of a 
home jurisdiction's supervisory interests over the subject activity and 
the extent to which the activity takes place within the home country's 
territory.\68\ At the same time, the Commission has also considered the 
potential for cross-border activities to have a significant connection 
with activities in, or effect on, commerce of the United States, as 
well as the global, highly integrated nature of today's swap markets. 
To fulfill the purposes of the Dodd-Frank Act swap reform, the 
Commission's supervisory oversight cannot be confined to activities 
strictly within the territory of the United States. In exercising its 
supervisory oversight outside the United States, however, the 
Commission will do so only as necessary to address risk to the 
resiliency and integrity of the U.S. financial system.\69\ The 
Commission will also strive to show deference to non-U.S. regulation 
when such regulation achieves comparable outcomes to mitigate 
unnecessary conflict with effective non-U.S. regulatory frameworks and 
limit fragmentation of the global marketplace.
---------------------------------------------------------------------------

    \66\ The Commission notes that it has consulted with the 
Securities and Exchange Commission (``SEC'') and prudential 
regulators regarding the Proposed Rule, as required by section 
712(a)(1) of the Dodd-Frank Act for the purposes of assuring 
regulatory consistency and comparability, to the extent possible. 
Dodd-Frank Act, Public Law 111-203, section 712(a)(1); 15 U.S.C. 
8302(a)(1). SEC staff was consulted to increase understanding of 
each other's regulatory approaches and to harmonize the cross-border 
approaches of the two agencies to the extent possible, consistent 
with their respective statutory mandates. As noted in the Entities 
Rule, the CFTC and SEC intended to address the cross-border 
application of Title VII in separate releases. See Entities Rule, 77 
FR at 30628 n.407.
    \67\ As discussed above, in developing the Proposed Rule, the 
Commission is guided by principles of international comity, which 
counsels due regard for the important interests of foreign 
sovereigns. See Restatement.
    \68\ The terms ``home jurisdiction'' or ``home country'' are 
used interchangeably in this release and refer to the jurisdiction 
in which the person or entity is established, including the European 
Union.
    \69\ See supra section I.C.
---------------------------------------------------------------------------

    The Commission has also sought to target those classes of entities 
whose activities--due to the nature of their relationship with a U.S. 
person or U.S. commerce--most clearly present the risks addressed by 
the Dodd-Frank Act provisions, and related regulations covered by the 
Proposed Rule. The Proposed Rule is designed to limit opportunities for 
regulatory arbitrage by applying the registration thresholds in a 
consistent manner to differing organizational structures that serve 
similar economic functions or have similar economic effects. At the 
same time, the Commission is mindful of the impact of its choices on 
market efficiency and competition, as well as the importance of 
international comity when exercising the Commission's authority. The 
Commission believes that the Proposed Rule reflects a measured approach 
that advances the goals underlying SD and MSP regulation, consistent 
with the Commission's statutory authority, while mitigating market 
distortions and inefficiencies, and avoiding fragmentation.

II. Key Definitions

    The Commission is proposing to define certain terms for the purpose 
of applying the Dodd-Frank Act swap provisions addressed by the 
Proposed Rule to cross-border transactions. If adopted, certain of 
these definitions would be relevant in assessing whether a person's 
activities have the requisite ``direct and significant'' connection 
with activities in, or effect on, U.S. commerce within the meaning of 
CEA section 2(i). Specifically, the definitions would be relevant in 
determining whether certain swaps or swap positions would need to be 
counted toward a person's SD or MSP threshold and in addressing the 
cross-border application of certain Dodd-Frank Act requirements (as 
discussed below in sections III through VI).
    The Commission acknowledges that the information necessary for a 
swap counterparty to accurately assess whether its counterparty or a 
specific swap meet one or more of the definitions discussed below may 
be unavailable, or available only through overly burdensome due 
diligence. For this reason, the Commission believes that a market 
participant should generally be permitted to reasonably rely on written 
counterparty representations in each of these

[[Page 959]]

respects.\70\ Therefore, proposed Sec.  23.23(a) states that a person 
may rely on a written representation from its counterparty that the 
counterparty does or does not satisfy the criteria for one or more of 
the definitions below, unless such person knows or has reason to know 
that the representation is not accurate. For the purposes of this rule 
a person would have reason to know the representation is not accurate 
if a reasonable person should know, under all of the facts of which the 
person is aware, that it is not accurate. The Commission notes that 
this is consistent with: (1) The reliance standard articulated in the 
Commission's external business conduct rules; \71\ (2) the Commission's 
approach in the Cross-Border Margin Rule; \72\ and (3) the reliance 
standard articulated in the ``U.S. person'' and ``transaction conducted 
through a foreign branch'' definitions adopted by the SEC in its rule 
addressing the regulation of cross-border securities-based swap 
activities (``SEC Cross-Border Rule'').\73\
---------------------------------------------------------------------------

    \70\ See Cross-Border Margin Rule, 81 FR at 34827; Guidance, 78 
FR at 45315.
    \71\ See 17 CFR 23.402(d).
    \72\ See Cross-Border Margin Rule, 81 FR at 34827.
    \73\ See 17 CFR 240.3a71-3(a)(3)(ii) & (4)(iv); Application of 
``Security-Based Swap Dealer'' and ``Major Security-Based Swap 
Participant'' Definitions to Cross-Border Security-Based Swap 
Activities; Republication, 79 FR 47278, 47313 (Aug. 12, 2014).
---------------------------------------------------------------------------

A. U.S. Person, Non-U.S. Person, and United States

    Under the Proposed Rule, a ``U.S. person'' would be defined as set 
forth below, consistent with the definition of ``U.S. person'' adopted 
by the SEC in the context of its regulations regarding cross-border 
securities-based swap activities.\74\ The Commission believes that such 
harmonization is appropriate, given that some firms may register both 
as SDs with the Commission and as security-based swap dealers with the 
SEC. The proposed definition of ``U.S. person'' also is consistent with 
the Commission's statutory mandate under the CEA, and in this regard is 
largely consistent with the definition of ``U.S. person'' in the Cross-
Border Margin Rule: \75\
---------------------------------------------------------------------------

    \74\ See 17 CFR 240.3a71-3(a)(4). See also SEC Cross-Border 
Rule, 79 FR at 47303-13.
    \75\ See 17 CFR 23.160(a)(10). See also Cross-Border Margin 
Rule, 81 FR at 34821-24.
---------------------------------------------------------------------------

    (1) A natural person resident in the United States; \76\
---------------------------------------------------------------------------

    \76\ Proposed Sec.  23.23(a)(22)(i)(1).
---------------------------------------------------------------------------

    (2) A 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; \77\
---------------------------------------------------------------------------

    \77\ Proposed Sec.  23.23(a)(22)(i)(2).
---------------------------------------------------------------------------

    (3) An account (whether discretionary or non-discretionary) of a 
U.S. person; \78\ or
---------------------------------------------------------------------------

    \78\ Proposed Sec.  23.23(a)(22)(i)(3).
---------------------------------------------------------------------------

    (4) An estate of a decedent who was a resident of the United States 
at the time of death.\79\
---------------------------------------------------------------------------

    \79\ Proposed Sec.  23.23(a)(22)(i)(4).
---------------------------------------------------------------------------

    The Commission believes that this definition offers a clear, 
objective basis for determining which individuals or entities should be 
identified as U.S. persons for purposes of the swap requirements 
addressed by the Proposed Rule. Specifically, the various prongs, as 
discussed in more detail below, are intended to identify persons whose 
activities have a significant nexus to the United States by virtue of 
their organization or domicile in the United States. In addition, 
harmonizing with the definition in the SEC Cross-Border Rule is not 
only consistent with section 2(i) of the CEA,\80\ but is expected to 
reduce undue compliance costs for market participants. As discussed 
below, the Commission is also of the view that the ``U.S. person'' 
definition in the Cross-Border Margin Rule would largely encompass the 
same universe of persons as the definition used in the SEC Cross-Border 
Rule and the Proposed Rule.\81\
---------------------------------------------------------------------------

    \80\ Harmonizing the Commission's definition of ``U.S. person'' 
with the definition in the SEC Cross-Border Rule also is consistent 
with the dictate in section 712(a)(7) of the Dodd-Frank Act that the 
CFTC and SEC ``treat functionally or economically similar'' SDs, 
MSPs, security-based swap dealers, and major security-based swap 
participants ``in a similar manner.'' Dodd Frank Act, Public Law 
111-203, section 712(a)(7)(A); 15 U.S.C. 8307(a)(7)(A).
    \81\ See Cross-Border Margin Rule, 81 FR at 34824 (``The 
Commission notes that, as discussed in the proposed rule, the Final 
Rule defines `U.S. person' in a manner that is substantially similar 
to the definition used by the SEC in the context of cross-border 
regulation of security-based swaps.'') As noted below, the 
Commission also requests comment on whether it should instead adopt 
the ``U.S. person'' definition in the Cross-Border Margin Rule.
---------------------------------------------------------------------------

    Proposed Sec.  23.23(a)(22)(i) identifies certain persons as a 
``U.S. person'' by virtue of their domicile or organization within the 
United States. The Commission has traditionally looked to where a legal 
entity is organized or incorporated (or in the case of a natural 
person, where he or she resides) to determine whether it is a U.S. 
person.\82\ In the Commission's view, these persons--by virtue of their 
decision to organize or locate in the United States and because they 
are likely to have significant financial and legal relationships in the 
United States--are appropriately included within the definition of 
``U.S. person.''
---------------------------------------------------------------------------

    \82\ See id. at 34823. See also 17 CFR 4.7(a)(1)(iv) (defining 
``Non-United States person'' for purposes of part 4 of the 
Commission regulations relating to commodity pool operators).
---------------------------------------------------------------------------

    More specifically, proposed Sec. Sec.  23.23(a)(22)(i)(1) and (2) 
generally incorporate a ``territorial'' concept of a U.S. person. That 
is, these are natural persons and legal entities that are physically 
located or incorporated within U.S. territory, and thus are subject to 
the Commission's jurisdiction. Further, the Commission would generally 
consider swap activities where such persons are counterparties, as a 
class and in the aggregate, as satisfying the ``direct and 
significant'' test under CEA section 2(i). Consistent with the ``U.S. 
person'' definition in the Cross-Border Margin Rule \83\ and the SEC 
Cross-Border Rule,\84\ the definition encompasses both foreign and 
domestic branches of an entity. As discussed below, a branch does not 
have a legal identity apart from its principal entity.
---------------------------------------------------------------------------

    \83\ See 17 CFR 23.160(a)(10)(iii) (U.S. person includes a 
corporation, partnership, limited liability company, business or 
other trust, association, joint-stock company, fund or any form of 
entity similar to any of the foregoing (other than an entity 
described in paragraph (a)(10)(iv) or (v) of this section) (a legal 
entity), in each case that is organized or incorporated under the 
laws of the United States or that has its principal place of 
business in the United States, including any branch of such legal 
entity) (emphasis added).
    \84\ See SEC Cross-Border Rule, 79 FR at 47308 (``[T]he final 
definition determines a legal person's status at the entity level 
and thus applies to the entire legal person, including any foreign 
operations that are part of the U.S. legal person. Consistent with 
this approach, a foreign branch, agency, or office of a U.S. person 
is treated as part of a U.S. person, as it lacks the legal 
independence to be considered a non-U.S. person for purposes of 
Title VII even if its head office is physically located within the 
United States.'').
---------------------------------------------------------------------------

    In addition, the Commission is of the view that proposed Sec.  
23.23(a)(22)(i)(2) subsumes the pension fund prong of the ``U.S. 
person'' definition in the Cross-Border Margin Rule.\85\ Specifically, 
Sec.  23.23(a)(22)(i)(2) would also include in the definition of the 
term ``U.S. person'' pension plans for the employees, officers, or 
principals of a legal entity described in Sec.  23.23(a)(22)(i)(2). 
Although the SEC Cross-Border Rule directly addresses pension funds 
only in the context of international financial institutions, discussed 
below, the Commission believes it is important to clarify that pension 
funds in other contexts could meet the requirements of proposed Sec.  
23.23(a)(22)(i)(2).
---------------------------------------------------------------------------

    \85\ See 17 CFR 23.160(a)(10)(iv).
---------------------------------------------------------------------------

    Finally, the Commission is of the view that proposed Sec.  
23.23(a)(22)(i)(2) subsumes the trust prong of the ``U.S. person'' 
definition in the Cross-Border

[[Page 960]]

Margin Rule.\86\ With respect to trusts addressed in proposed Sec.  
23.23(a)(22)(i)(2), the Commission expects that its approach would be 
consistent with the manner in which trusts are treated for other 
purposes under the law. The Commission has considered that each trust 
is governed by the laws of a particular jurisdiction, which may depend 
on steps taken when the trust was created or other circumstances 
surrounding the trust. The Commission believes that if a trust is 
governed by U.S. law (i.e., the law of a state or other jurisdiction in 
the United States), then it would generally be reasonable to treat the 
trust as a U.S. person for purposes of the Proposed Rule. Another 
relevant element in this regard would be whether a court within the 
United States is able to exercise primary supervision over the 
administration of the trust. The Commission expects that this aspect of 
the definition would generally align the treatment of the trust for 
purposes of the Proposed Rule with how the trust is treated for other 
legal purposes. For example, the Commission expects that if a person 
could bring suit against the trustee for breach of fiduciary duty in a 
U.S. court (and, as noted above, the trust is governed by U.S. law), 
then treating the trust as a U.S. person would generally be consistent 
with its treatment for other purposes.
---------------------------------------------------------------------------

    \86\ See 17 CFR 23.160(a)(10)(v).
---------------------------------------------------------------------------

    As noted in the Cross-Border Margin Rule,\87\ and consistent with 
the SEC \88\ definition of ``U.S. person,'' proposed Sec.  
23.23(a)(22)(ii) provides that the principal place of business means 
the location from which the officers, partners, or managers of the 
legal person primarily direct, control, and coordinate the activities 
of the legal person. With the exception of externally managed entities, 
as discussed below, the Commission is of the view that for most 
entities, the location of these officers, partners, or managers 
generally would correspond to the location of the person's headquarters 
or main office. However, the Commission believes that a definition that 
focuses exclusively on whether a legal person is organized, 
incorporated, or established in the United States could encourage some 
entities to move their place of incorporation to a non-U.S. 
jurisdiction to avoid complying with the relevant Dodd-Frank Act 
requirements, while maintaining their principal place of business--and 
therefore, risks arising from their swap transactions--in the United 
States. Moreover, a ``U.S. person'' definition that does not include a 
``principal place of business'' element could result in certain 
entities falling outside the scope of the relevant Dodd-Frank Act-
related requirements, even though the nature of their legal and 
financial relationships in the United States is, as a general matter, 
indistinguishable from that of entities incorporated, organized, or 
established in the United States. Therefore, the Commission is of the 
view that it is appropriate to treat such entities as U.S. persons for 
purposes of the Proposed Rule.\89\
---------------------------------------------------------------------------

    \87\ Cross-Border Margin Rule, 81 FR at 34823.
    \88\ 17 CFR 240.3a71-3(a)(4)(ii).
    \89\ See SEC Cross-Border Rule, 79 FR at 47309.
---------------------------------------------------------------------------

    However, determining the principal place of business of a 
collective investment vehicle (``CIV''), such as an investment fund or 
commodity pool, may require consideration of additional factors beyond 
those applicable to operating companies. The Commission is of the view 
that with respect to an externally managed investment vehicle, this 
location is the office from which the manager of the vehicle primarily 
directs, controls, and coordinates the investment activities of the 
vehicle.\90\ This interpretation is consistent with the Supreme Court's 
decision in Hertz Corp. v. Friend, which described a corporation's 
principal place of business, for purposes of diversity jurisdiction, as 
the ``place where the corporation's high level officers direct, 
control, and coordinate the corporation's activities.'' \91\ In the 
case of a CIV, the senior personnel that direct, control, and 
coordinate a CIV's activities are generally not the named directors or 
officers of the CIV, but rather persons employed by the CIV's 
investment advisor or promoter, or in the case of a commodity pool, its 
commodity pool operator. Therefore, consistent with the SEC Cross-
Border Rule,\92\ when a primary manager is responsible for directing, 
controlling, and coordinating the overall activity of a CIV, the CIV's 
principal place of business under the proposed rule would be the 
location from which the manager carries out those responsibilities.
---------------------------------------------------------------------------

    \90\ Proposed Sec.  23.23(a)(22)(ii).
    \91\ See 559 U.S. 77, 80 (2010); Cross-Border Margin Rule, 81 FR 
at 34823.
    \92\ See SEC Cross-Border Rule, 79 FR at 47310-11.
---------------------------------------------------------------------------

    The Commission notes that under the Cross-Border Margin Rule,\93\ 
the Commission would generally consider the principal place of business 
of a CIV to be in the United States if the senior personnel responsible 
for either: (1) The formation and promotion of the CIV; or (2) the 
implementation of the CIV's investment strategy are located in the 
United States, depending on the facts and circumstances that are 
relevant to determining the center of direction, control, and 
coordination of the CIV. Although the second prong of that discussion 
is consistent with the approach discussed above, the Commission does 
not believe that activities such as formation of the CIV, absent an 
ongoing role by the person performing those activities in directing, 
controlling, and coordinating the investment activities of the CIV, 
generally will be as indicative of activities, financial and legal 
relationships, and risks within the United States of the type that 
Title VII is intended to address as the location of a CIV manager.
---------------------------------------------------------------------------

    \93\ See Cross-Border Margin Rule, 81 FR at 34823. This is also 
generally consistent with the views expressed in the Guidance. See 
Guidance, 78 FR at 45309-12.
---------------------------------------------------------------------------

    With respect to proposed Sec.  23.23(a)(22)(i)(4), the Commission 
believes that the swaps of a decedent's estate should generally be 
treated the same as the swaps entered into by the decedent during their 
life.\94\ If the decedent was a party to any swaps at the time of 
death, then those swaps should generally continue to be treated in the 
same way after the decedent's death, at which time the swaps would most 
likely pass to the decedent's estate. Also, the Commission expects that 
this prong will be predictable and straightforward to apply for natural 
persons planning for how their swaps will be treated after death, for 
executors and administrators of estates, and for the swap 
counterparties to natural persons and estates.
---------------------------------------------------------------------------

    \94\ The Commission expects that relatively few estates would 
enter into swaps, and those that do would likely do so for hedging 
purposes.
---------------------------------------------------------------------------

    Proposed Sec.  23.23(a)(22)(i)(3) is intended to ensure that 
persons described in prongs (1), (2), and (4) of the definition would 
be treated as U.S. persons even if they use discretionary or non-
discretionary accounts to enter into swaps, irrespective of whether the 
person at which the account is held or maintained is a U.S. person. 
Consistent with the Cross-Border Margin Rule, the Commission is of the 
view that this prong would apply for individual or joint accounts.\95\
---------------------------------------------------------------------------

    \95\ See 17 CFR 23.160(a)(10)(vii).
---------------------------------------------------------------------------

    Unlike the Cross-Border Margin Rule, the proposed definition of 
``U.S. person'' would not include certain legal entities that are owned 
by one or more U.S. person(s) and for which such person(s) bear 
unlimited responsibility for the obligations and liabilities of the 
legal entity (``unlimited U.S. responsibility prong'').\96\ This prong 
was

[[Page 961]]

designed to capture persons that could give rise to risk to the U.S. 
financial system in the same manner as with non-U.S. persons whose swap 
transactions are subject to explicit financial support arrangements 
from U.S. persons. Rather than including this prong in its ``U.S. 
person'' definition, the SEC took the view that when a non-U.S. 
person's counterparty has recourse to a U.S. person for the performance 
of the non-U.S. person's obligations under a security-based swap by 
virtue of the U.S. person's unlimited responsibility for the non-U.S. 
person, the non-U.S. person would be required to include the security-
based swap in its security-based swap dealer (if it is a dealing 
security-based swap) and major security-based swap participant 
threshold calculations as a guarantee.\97\ However, as discussed in the 
Cross-Border Margin Rule, the Commission does not view the unlimited 
U.S. responsibility prong as equivalent to a U.S. guarantee because a 
guarantee does not necessarily provide for unlimited responsibility for 
the obligations and liabilities of the guaranteed entity in the same 
sense that the owner of an unlimited liability corporation bears such 
unlimited liability.\98\
---------------------------------------------------------------------------

    \96\ See 17 CFR 23.160(a)(10)(vi); Cross-Border Margin Rule, 81 
FR at 34823-24. The Guidance included a similar concept in the 
definition of the term ``U.S. person.'' However, the definition 
contained in the Guidance would generally characterize a legal 
entity as a U.S. person if the entity were ``directly or indirectly 
majority-owned'' by one or more persons falling within the term 
``U.S. person'' and such U.S. person(s) bears unlimited 
responsibility for the obligations and liabilities of the legal 
entity. See Guidance, 78 FR at 45312-13 (discussing the unlimited 
U.S. responsibility prong for purposes of the Guidance).
    \97\ See SEC Cross-Border Rule, 79 FR at 47308 n.255, 47316-17.
    \98\ See Cross-Border Margin Rule, 81 FR at 34823 n.60.
---------------------------------------------------------------------------

    The Commission is declining at this time to revisit its 
interpretation of ``guarantee,'' discussed below, and is not including 
an ``unlimited U.S. responsibility prong'' in the ``U.S. person'' 
definition in the Proposed Rule. The Commission is of the view that the 
corporate structure that this prong is designed to capture is not one 
that is commonly in use in the marketplace. As noted below, the 
Commission requests comments on whether this understanding is correct, 
and if not, whether the Commission should add this prong to the 
proposed ``U.S. person'' definition or reassess its proposed 
interpretation of a ``guarantee.'' In addition, the Commission notes 
that the treatment of the unlimited U.S. liability prong in the 
Proposed Rule would not impact an entity's obligations with respect to 
the Cross-Border Margin Rule. To the extent that entities are 
considered U.S. persons for purposes of the Cross-Border Margin Rule as 
a result of the unlimited U.S. liability prong, the Commission believes 
that the different purpose of the registration-related rules justifies 
this potentially different treatment.
    The proposed ``U.S. person'' definition is generally consistent 
with the ``U.S. person'' interpretation set forth in the Guidance, with 
certain exceptions.\99\ As noted above,\100\ the Cross-Border Margin 
Rule and the Guidance incorporated a version of the unlimited U.S. 
responsibility prong in the U.S. person definition. In addition, 
consistent with the definition of ``U.S. person'' in the Cross-Border 
Margin Rule \101\ and the SEC Cross-Border Rule,\102\ the proposed 
definition does not include a commodity pool, pooled account, 
investment fund, or other CIV that is majority-owned by one or more 
U.S. persons.\103\ Similar to the SEC, the Commission is of the view 
that including majority-owned CIVs within the definition of ``U.S. 
person'' for the purposes of the Proposed Rule would be likely to cause 
more CIVs to incur additional programmatic costs associated with the 
relevant Title VII requirements and ongoing assessments, while not 
significantly increasing programmatic benefits given that the 
composition of a CIV's beneficial owners is not likely to have 
significant bearing on the degree of risk that the CIV's swap activity 
poses to the U.S. financial system.\104\ Although many of these CIVs 
have U.S. participants that could be adversely impacted in the event of 
a counterparty default, systemic risk concerns are mitigated to the 
extent these collective investment vehicles would be subject to margin 
requirements in foreign jurisdictions. In addition, the exposure of 
participants to losses in CIVs is typically limited to their investment 
amount, and it is unlikely that a participant in a CIV would make 
counterparties whole in the event of a default.\105\ Further, the 
Commission continues to believe that identifying and tracking a CIV's 
beneficial ownership may pose a significant challenge in certain 
circumstances (e.g., fund-of-funds or master-feeder structures).\106\ 
Therefore, although the U.S. participants in such CIVs may be adversely 
impacted in the event of a counterparty default, the Commission 
believes that, on balance, the majority-ownership test should not be 
included in the proposed definition of U.S. person. Note that a CIV 
fitting within the majority U.S. ownership prong may also be a U.S. 
person within the scope of Sec.  23.23(a)(22)(i)(2) of the Proposed 
Rule (entities organized or having a principal place of business in the 
United States). As the Commission clarified in the Cross-Border Margin 
Rule, whether a pool, fund, or other CIV is publicly offered only to 
non-U.S. persons and not offered to U.S. persons would not be relevant 
in determining whether it falls within the scope of the proposed U.S. 
person definition.\107\
---------------------------------------------------------------------------

    \99\ See Guidance, 78 FR at 45308-17 (setting forth the 
interpretation of ``U.S. person'' for purposes of the Guidance).
    \100\ See supra note 96.
    \101\ See Cross-Border Margin Rule, 81 FR at 34824.
    \102\ See SEC Cross-Border Rule, 79 FR at 47311, 47337.
    \103\ See Guidance, 78 FR at 45313-14 (discussing the U.S. 
majority-ownership prong for purposes of the Guidance and 
interpreting ``majority-owned'' in this context to mean the 
beneficial ownership of more than 50 percent of the equity or voting 
interests in the collective investment vehicle).
    \104\ See SEC Cross-Border Rule, 79 FR at 47337.
    \105\ See id. at 47311.
    \106\ See Cross-Border Margin Rule, 81 FR at 34824.
    \107\ See id. at 81 FR at 34824 n.62.
---------------------------------------------------------------------------

    Unlike the non-exhaustive ``U.S. person'' definition provided in 
the Guidance, the proposed definition of ``U.S. person'' is limited to 
persons enumerated in the rule, consistent with the Cross-Border Margin 
Rule and the SEC Cross-Border Rule.\108\ The Commission believes that 
the proposed prongs discussed above would capture those persons with 
sufficient jurisdictional nexus to the financial system and commerce in 
the United States that they should be categorized as ``U.S. persons'' 
pursuant to the Proposed Rule.
---------------------------------------------------------------------------

    \108\ See Cross-Border Margin Rule, 81 FR at 34824; Guidance, 78 
FR at 45316 (discussing the inclusion of the prefatory phrase 
``include, but not be limited to'' in the interpretation of ``U.S. 
person'' in the Guidance).
---------------------------------------------------------------------------

    Further, in consideration of the discretionary and appropriate 
exercise of international comity-based doctrines, proposed Sec.  
23.23(a)(22)(iii) states that the term ``U.S. person'' would not 
include international financial institutions, as defined below. 
Specifically, consistent with the SEC's definition,\109\ the term U.S. 
person would not include the International Monetary Fund, the 
International Bank for Reconstruction and Development, the Inter-
American Development Bank, the Asian Development Bank, the African 
Development Bank, the United Nations, and their agencies and pension 
plans, and any other similar international organizations, their 
agencies, and pension plans. The Commission believes that although 
foreign entities are not necessarily immune from U.S. jurisdiction for 
commercial activities undertaken with

[[Page 962]]

U.S. counterparties or in U.S. markets, the sovereign or international 
status of such international financial institutions that themselves 
participate in the swap markets in a commercial manner is relevant in 
determining whether such entities should be treated as U.S. persons, 
regardless of whether any of the prongs of the proposed definition 
would apply.\110\ There is nothing in the text or history of the swap-
related provisions of Title VII to suggest that Congress intended to 
deviate from the traditions of the international system by including 
such international financial institutions within the definitions of the 
term ``U.S. person.'' \111\
---------------------------------------------------------------------------

    \109\ 17 CFR 240.3a71-3(a)(4)(iii).
    \110\ See, e.g., Entities Rule, 77 FR at 30692-93 (discussing 
the application of the ``swap dealer'' and ``major swap 
participant'' definitions to foreign governments, foreign central 
banks, and international financial institutions). The Commission 
also notes that a similar approach was taken in the Guidance. 
Guidance, 78 FR at 45353 n.531 (``Where the counterparty to a non-
U.S. swap dealer or non-U.S. MSP is an international financial 
institution such as the World Bank, the Commission also generally 
would not expect the parties to the swap to comply with the Category 
A Transaction-Level Requirements, even if the principal place of 
business of the international financial institution were located in 
the United States. . . . Even though some or all of these 
international financial institutions may have their principal place 
of business in the United States, the Commission would generally not 
consider the application of the Category A Transaction-Level 
Requirements to be warranted, for the reasons of the traditions of 
the international system discussed in the [Entities Rule].'').
    \111\ To the contrary, section 752(a) of the Dodd-Frank Act 
requires the CFTC to consult and coordinate with other regulators on 
the establishment of consistent international standards with respect 
to the regulation (including fees) of swaps and swap entities.
---------------------------------------------------------------------------

    Consistent with the Entities Rule and the Guidance, the Commission 
is of the view that the term ``international financial institutions'' 
includes the ``international financial institutions'' that are defined 
in 22 U.S.C. 262r(c)(2) and institutions defined as ``multilateral 
development banks'' in the European Union's regulation on ``OTC 
derivatives, central counterparties and trade repositories.'' \112\ 
Reference to 22 U.S.C. 262r(c)(2) and the European Union definition is 
consistent with Commission precedent in the Entities Rule.\113\ The 
Commission continues to believe that both of those definitions identify 
many of the entities for which discretionary and appropriate exercise 
of international comity-based doctrines is appropriate with respect to 
the ``U.S. person'' definition.\114\ The Commission is of the view that 
this prong would also include institutions identified in CFTC Staff 
Letters 17-34 \115\ and 18-13.\116\ In CFTC Staff Letter 17-34, 
Commission staff provided relief from CFTC margin requirements to swaps 
between SDs and the European Stability Mechanism (``ESM''),\117\ and in 
CFTC Staff Letter 18-13, Commission staff identified the North American 
Development Bank (``NADB'') as an additional entity that should be 
considered an international financial institution for purposes of 
applying the SD and MSP definitions.\118\ Interpreting the definition 
to include the two entities identified in CFTC Staff Letters 17-34 and 
18-13 is consistent with the discretionary and appropriate exercise of 
international comity because the status of both entities is similar to 
that of the other international financial institutions identified in 
the Entities Rule. Consistent with the SEC definition of ``U.S. 
person,'' the Proposed Rule lists specific international financial 
institutions but also provides a catch-all for ``any other similar 
international organizations, their agencies, and pension plans.'' The 
Commission believes that the catch-all provision would extend to any of 
the specific entities discussed above that are not explicitly listed in 
the Proposed Rule.
---------------------------------------------------------------------------

    \112\ Regulation (EU) No 648/2012 of the European Parliament and 
of the Council on OTC Derivative Transactions, Central 
Counterparties and Trade Repositories, Article 1(5(a)) (July 4, 
2012), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32012R0648. Article 1(5(a)) references Section 4.2 of 
Part 1 of Annex VI to Directive 2006/48/EC, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32006L0048.
    \113\ Entities Rule, 77 FR at 30692, n.1180. Additionally, the 
Commission notes that the Guidance referenced the Entities Rule's 
interpretation as well. Guidance, 78 FR at 45353 n.531.
    \114\ The definitions overlap but together include the 
following: The International Monetary Fund, International Bank for 
Reconstruction and Development, European Bank for Reconstruction and 
Development, International Development Association, International 
Finance Corporation, Multilateral Investment Guarantee Agency, 
African Development Bank, African Development Fund, Asian 
Development Bank, Inter-American Development Bank, Bank for Economic 
Cooperation and Development in the Middle East and North Africa, 
Inter-American Investment Corporation, Council of Europe Development 
Bank, Nordic Investment Bank, Caribbean Development Bank, European 
Investment Bank and European Investment Fund. Note that the 
International Bank for Reconstruction and Development, the 
International Development Association, the International Finance 
Corporation, and the Multilateral Investment Guarantee Agency are 
parts of the World Bank Group.
    \115\ See CFTC Staff Letter No. 17-34, Commission Regulations 
23.150-159, 161: No-Action Position with Respect to Uncleared Swaps 
with the European Stability Mechanism (Jul, 24, 2017), available at 
https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17-34.pdf. See also CFTC Staff 
Letter No. 19-22, Commission Regulations 23.150-159, 23.161: Revised 
No-Action Position with Respect to Uncleared Swaps with the European 
Stability Mechanism (Oct. 16, 2019), available at https://www.cftc.gov/csl/19-22/download.
    \116\ See CFTC Staff Letter No. 18-13, No-Action Position: 
Relief for Certain Non-U.S. Persons from Including Swaps with 
International Financial Institutions in Determining Swap Dealer and 
Major Swap Participant Status (May 16, 2018), available at https://www.cftc.gov/sites/default/files/csl/pdfs/18/18-13.pdf.
    \117\ See CFTC Staff Letter No. 17-34. In addition, in October 
2019, the Commission approved a proposal to exclude ESM from the 
definition of ``financial end user'' in Sec.  23.151, which, if 
adopted, would have the effect of excluding swaps between certain 
SDs and ESM from the Commission's uncleared swap margin 
requirements. See Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 84 FR 56392 (Oct. 22, 2019).
    \118\ See CFTC Staff Letter 18-13. See also CFTC Staff Letter 
17-59 (Nov. 17, 2017) (providing no-action relief to NADB from the 
swap clearing requirement of section 2(h)(1) of the CEA), available 
at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/17-59.pdf.
---------------------------------------------------------------------------

    As described above, the Commission is of the view that the proposed 
``U.S. person'' definition is largely similar to the definition in the 
Cross-Border Margin Rule. Specifically, the Commission believes that 
any person designated as a ``U.S. person'' under the Proposed Rule 
would also be designated as such under the Cross-Border Margin Rule. 
Therefore, the Commission believes any inconsistencies do not raise 
significant concerns regarding the practical application of the ``U.S. 
person'' definitions. Further, the Commission believes that having a 
definition that is harmonized with the SEC allows for more efficient 
application of the definitions by market participants, including 
entities that may engage in dealing activity with respect to both swaps 
and security-based swaps. Therefore, the Commission may also consider 
amending the ``U.S. person'' definition in the Cross-Border Margin Rule 
in the future. However, to provide certainty to market participants, 
proposed Sec.  23.23(a)(22)(iv) would permit reliance, until December 
31, 2025, on any U.S. person-related representations that were obtained 
to comply with the Cross-Border Margin Rule. This time-limited relief 
is appropriate so that market participants do not have to immediately 
obtain new representations from their counterparties. The Commission 
also believes that any person designated as a ``U.S. person'' under the 
Proposed Rule would also be a ``U.S. person'' under the Guidance 
definition, since the Proposed Rule's definition is narrower in scope. 
Therefore, the Commission is of the view that market participants would 
also be able to rely on representations previously obtained using the 
``U.S. person'' definition in the Guidance.
    The term ``non-U.S. person'' would be defined to mean any person 
that is not a U.S. person.\119\ Further, the Proposed Rule would define 
``United States'' and ``U.S.'' as the United States of America,

[[Page 963]]

its territories and possessions, any State of the United States, and 
the District of Columbia.\120\
---------------------------------------------------------------------------

    \119\ Proposed Sec.  23.23(a)(9).
    \120\ Proposed Sec.  23.23(a)(19).
---------------------------------------------------------------------------

B. Guarantee

    Under the Proposed Rule, consistent with the Cross-Border Margin 
Rule,\121\ a ``guarantee'' would mean an arrangement, pursuant to which 
one party to a swap has rights of recourse against a guarantor, with 
respect to its counterparty's obligations under the swap.\122\ For 
these purposes, a party to a swap has rights of recourse against a 
guarantor if the party has a conditional or unconditional legally 
enforceable right to receive or otherwise collect, in whole or in part, 
payments from the guarantor with respect to its counterparty's 
obligations under the swap. Also, the term ``guarantee'' would 
encompass any arrangement pursuant to which the guarantor itself has a 
conditional or unconditional legally enforceable right to receive or 
otherwise collect, in whole or in part, payments from any other 
guarantor with respect to the counterparty's obligations under the 
swap.
---------------------------------------------------------------------------

    \121\ See 17 CFR 23.160(a)(2). However, in contrast with the 
Cross-Border Margin Rule, the application of the proposed definition 
of ``guarantee'' would not be limited to uncleared swaps.
    \122\ Proposed Sec.  23.23(a)(8).
---------------------------------------------------------------------------

    Consistent with the Cross-Border Margin Rule, the proposed term 
``guarantee'' would apply regardless of whether such right of recourse 
is conditioned upon the non-U.S. person's insolvency or failure to meet 
its obligations under the relevant swap, and regardless of whether the 
counterparty seeking to enforce the guarantee is required to make a 
demand for payment or performance from the non-U.S. person before 
proceeding against the U.S. guarantor.\123\ The terms of the guarantee 
need not necessarily be included within the swap documentation or even 
otherwise reduced to writing (so long as legally enforceable rights are 
created under the laws of the relevant jurisdiction), provided that a 
swap counterparty has a conditional or unconditional legally 
enforceable right, in whole or in part, to receive payments from, or 
otherwise collect from, the U.S. person in connection with the non-U.S. 
person's obligations under the swap. For purposes of the Proposed Rule, 
the Commission would generally consider swap activities involving 
guarantees from U.S. persons to satisfy the ``direct and significant'' 
test under CEA section 2(i).
---------------------------------------------------------------------------

    \123\ See 17 CFR 23.160(a)(2); Cross-Border Margin Rule, 81 FR 
at 34825.
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    The proposed term ``guarantee'' would also encompass any 
arrangement pursuant to which the counterparty to the swap has rights 
of recourse, regardless of the form of the arrangement, against at 
least one U.S. person (either individually, jointly, and/or severally 
with others) for the non-U.S. person's obligations under the swap.\124\ 
This addresses concerns that swaps could be structured such that they 
would not have to count toward a non-U.S. person's de minimis threshold 
calculation. For example, consider a swap between two non-U.S. persons 
(``Party A'' and ``Party B''), where Party B's obligations to Party A 
under the swap are guaranteed by a non-U.S. affiliate (``Party C''), 
and where Party C's obligations under the guarantee are further 
guaranteed by a U.S. parent entity (``Parent D''). The proposed 
definition of ``guarantee'' would deem a guarantee to exist between 
Party B and Parent D with respect to Party B's obligations under the 
swap with Party A.\125\
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    \124\ See Cross-Border Margin Rule, 81 FR at 34825.
    \125\ See id. This example is included for illustrative purposes 
only and is not intended to cover all examples of swaps that could 
be affected by the Proposed Rule, if adopted.
---------------------------------------------------------------------------

    Further, the Commission's proposed definition of guarantee would 
not be affected by whether the U.S. guarantor is an affiliate of the 
non-U.S. person because, in each case, regardless of affiliation, the 
swap counterparty has a conditional or unconditional legally 
enforceable right, in whole or in part, to receive payments from, or 
otherwise collect from, the U.S. person in connection with the non-U.S. 
person's obligations.
    The Commission also notes that the proposed ``guarantee'' 
definition would not apply when a non-U.S. person has a right to be 
compensated by a U.S. person with respect to the non-U.S. person's own 
obligations under the swap. For example, consider a swap between two 
non-U.S. persons (``Party E'' and ``Party F''), where Party E enters 
into a back-to-back swap with a U.S. person (``Party G''), or enters 
into an agreement with Party G to be compensated for any payments made 
by Party E under the swap in return for passing along any payments 
received. In such an arrangement, a guarantee would not exist because 
Party F would not have a right to collect payments from Party G with 
respect to Party E's obligations under the swap (assuming no other 
agreements exist).
    As with the Cross-Border Margin Rule, the definition of 
``guarantee'' in the Proposed Rule is narrower in scope than the one 
used in the Guidance.\126\ Under the Guidance, the Commission advised 
that it would interpret the term ``guarantee'' generally to include not 
only traditional guarantees of payment or performance of the related 
swaps, but also other formal arrangements that, in view of all the 
facts and circumstances, support the non-U.S. person's ability to pay 
or perform its swap obligations. The Commission stated that it believed 
that it was necessary to interpret the term ``guarantee'' to include 
the different financial arrangements and structures that transfer risk 
directly back to the United States.\127\ The Commission is aware that 
many other types of financial arrangements or support, other than a 
guarantee as defined in the Proposed Rule, may be provided by a U.S. 
person to a non-U.S. person (e.g., keepwells and liquidity puts, 
certain types of indemnity agreements, master trust agreements, 
liability or loss transfer or sharing agreements). The Commission 
understands that these other financial arrangements or support transfer 
risk directly back to the U.S. financial system, with possible 
significant adverse effects, in a manner similar to a guarantee with a 
direct recourse to a U.S. person. However, the Commission believes that 
a narrower definition of guarantee than that in the Guidance would 
achieve a more workable framework for non-U.S. persons, particularly 
because this definition of ``guarantee'' would be consistent with the 
Cross-Border Margin Rule, and therefore would not require a separate 
independent assessment, without undermining the protection of U.S. 
persons and the U.S. financial system. The Commission recognizes that 
the proposed definition of ``guarantee'' could, if adopted, lead to 
certain entities counting fewer swaps towards their de minimis 
threshold as compared to the definition in the Guidance. However, the 
Commission believes that concerns arising from fewer swaps being 
counted could be mitigated to the extent such non-U.S. person meets the 
definition of a ``significant risk subsidiary,'' and thus, as discussed 
below, would potentially still need to count certain swaps or swap 
positions toward its SD or MSP registration threshold. In this way, 
non-U.S. persons receiving support from a U.S. person and representing 
some measure of material risk to the U.S. financial system would be 
captured. The Commission thus believes that the Proposed Rule would 
achieve the dual goals of protecting the U.S. markets

[[Page 964]]

while promoting a workable cross-border framework.
---------------------------------------------------------------------------

    \126\ See id. at 34824.
    \127\ Guidance, 78 FR at 45320.
---------------------------------------------------------------------------

    For discussion purposes in this release, a non-U.S. person would be 
considered a ``Guaranteed Entity'' with respect to swaps that are 
guaranteed by a U.S. person. A non-U.S. person may be a Guaranteed 
Entity with respect to swaps with certain counterparties because the 
non-U.S. person's swaps with those counterparties are guaranteed, but 
would not be a Guaranteed Entity with respect to swaps with other 
counterparties if the non-U.S. person's swaps with the other 
counterparties are not guaranteed by a U.S. person. In other words, 
depending on the nature of the trading relationship, a single entity 
could be a Guaranteed Entity with respect to some of its swaps, but not 
others. This release uses the term ``Other Non-U.S. Person'' to refer 
to a non-U.S. person that is neither a Guaranteed Entity nor a 
significant risk subsidiary. Depending on an entity's corporate 
structure and financial relationships, a single entity could be both, 
for example, a Guaranteed Entity and an Other Non-U.S. Person.

C. Significant Risk Subsidiary, Significant Subsidiary, Subsidiary, 
Parent Entity, and U.S. GAAP

    In the Proposed Rule, the Commission is proposing a new category of 
person termed a significant risk subsidiary (``SRS''). A non-U.S. 
person would be considered an SRS if: (1) The non-U.S. person is a 
``significant subsidiary'' of an ``ultimate U.S. parent entity,'' as 
those terms are proposed to be defined; (2) the ``ultimate U.S. parent 
entity'' has more than $50 billion in global consolidated assets, as 
determined in accordance with U.S. GAAP at the end of the most recently 
completed fiscal year; and (3) the non-U.S. person is not subject to 
either: (a) Consolidated supervision and regulation by the Board of 
Governors of the Federal Reserve System (``Federal Reserve Board'') as 
a subsidiary of a U.S. bank holding company (``BHC''); or (b) capital 
standards and oversight by the non-U.S. person's home country regulator 
that are consistent with the Basel Committee on Banking Supervision's 
``International Regulatory Framework for Banks'' (``Basel III'') and 
margin requirements for uncleared swaps in a jurisdiction for which the 
Commission has issued a comparability determination (``CFTC Margin 
Determination'') with respect to uncleared swap margin 
requirements.\128\ If an entity is determined to be an SRS, the 
Commission proposes to apply certain regulations, including the SD and 
MSP registration threshold calculations, to the entity in the same 
manner as a U.S. person.
---------------------------------------------------------------------------

    \128\ Proposed Sec.  23.23(a)(11)-(14) and (18).
---------------------------------------------------------------------------

1. Non-U.S. Persons With U.S. Parent Entities
    In addition to the U.S. persons described above in section II.A, 
the Commission understands that U.S. persons may organize the 
operations of their businesses through the use of one or more 
subsidiaries that are organized and operated outside the United States. 
Through consolidation, non-U.S. subsidiaries of U.S. persons may permit 
U.S. persons to accrue risk through the swap activities of their non-
U.S. subsidiaries that, in aggregate, may have a significant effect on 
the U.S. financial system. Therefore, the Commission believes that 
consolidated non-U.S. subsidiaries of U.S. persons may appropriately be 
subject to Commission regulation due to their direct and significant 
relationship to their U.S. parent entities. Thus, the Commission 
believes that consolidated non-U.S. subsidiaries of U.S. parent 
entities present a greater supervisory interest to the CFTC, relative 
to Other Non-U.S. Persons. Moreover, because U.S. persons have 
regulatory obligations under the CEA that Other Non-U.S. Persons may 
not have, the Commission also believes that consolidated non-U.S. 
subsidiaries of U.S. parent entities present a greater supervisory 
interest to the CFTC relative to Other Non-U.S. Persons due to the 
Commission's interest in preventing the evasion of obligations under 
the CEA.
    Pursuant to the consolidation requirements of U.S. GAAP, the 
financial statements of a U.S. parent entity reflect the financial 
position and results of operations of that parent entity, together with 
the network of branches and subsidiaries in which the U.S. parent 
entity has a controlling interest, including non-U.S. subsidiaries, 
which is an indication of connection and potential risk to the U.S. 
parent entity. Consolidation under U.S. GAAP is predicated on the 
financial control of the reporting entity. Therefore, an entity within 
a financial group that is consolidated with its parent entity for 
accounting purposes in accordance with U.S. GAAP is subject to the 
financial control of that parent entity. By virtue of consolidation 
then, a non-U.S. subsidiary's swap activity creates direct risk to the 
U.S. parent. That is, as a result of consolidation and financial 
control, the financial position, operating results, and statement of 
cash flows of a non-U.S. subsidiary are included in the financial 
statements of its U.S. parent and therefore affect the financial 
condition, risk profile, and market value of the parent. Because of 
that relationship, risks taken by a non-U.S. subsidiary can have a 
direct effect on the U.S. parent entity. Furthermore, a non-U.S. 
subsidiary's counterparties may generally look to both the subsidiary 
and its U.S. parent for fulfillment of the subsidiary's obligations 
under a swap, even without any explicit guarantee. In many cases, the 
Commission believes that counterparties would not enter into the 
transaction with the subsidiary (or would not do so on the same terms), 
and the subsidiary would not be able to engage in a swap business, 
absent this close relationship with a parent entity. In addition, the 
Commission notes that a non-U.S. subsidiary may enter into offsetting 
swaps or other arrangements with its U.S. parent entity or other 
affiliate(s) to transfer the risks and benefits of swaps with non-U.S. 
persons to its U.S. affiliates, which could also lead to risk for the 
U.S. parent entity. Because such swap activities may have a direct 
impact on the financial position, risk profile, and market value of a 
U.S. parent entity, they can lead to spill-over effects on the U.S. 
financial system.
    However, the Commission preliminarily believes the principles of 
international comity counsel against applying its swap regulations to 
all non-U.S. subsidiaries of U.S. parent entities. Rather, the 
Commission believes that it is consistent with such principles to apply 
a risk-based approach to determining which of such entities should be 
required to comply with the Commission's swap requirements. The 
Commission believes that its approach in the Proposed Rule makes that 
determination in a manner that accounts for the risk that non-U.S. 
subsidiaries may pose to the U.S. financial system and the ability of 
large global entities to efficiently operate outside the United States.
    The Commission's risk-based approach is embodied in the proposed 
definition of an SRS. SRSs are entities whose obligations under swaps 
may not be guaranteed by U.S. persons, but which nonetheless raise 
particular supervisory concerns in the United States due to the 
possible negative impact on their ultimate U.S. parent entities and 
thus the U.S. financial system.
2. Preliminary Definitions
    For purposes of the SRS definition, the term ``subsidiary'' would 
mean a subsidiary of a specified person that is an affiliate controlled 
by such person directly, or indirectly through one or

[[Page 965]]

more intermediaries.\129\ For purposes of this definition, an affiliate 
of, or a person affiliated with, a specific person would be a person 
that directly, or indirectly through one or more intermediaries, 
controls, or is controlled by, or is under common control with, the 
person specified. The term ``control,'' including controlling, 
controlled by, and under common control with, would mean the 
possession, direct or indirect, of the power to direct or cause the 
direction of the management and policies of a person, whether through 
the ownership of voting shares, by contract, or otherwise.\130\ These 
proposed definitions of subsidiary and control are substantially 
similar to the definitions found in SEC regulation S-X. Further, under 
the Proposed Rule, the term ``parent entity'' would mean any entity in 
a consolidated group that has one or more subsidiaries in which the 
entity has a controlling interest, in accordance with U.S. GAAP.\131\ 
U.S. GAAP is defined in the Proposed Rule as U.S. generally accepted 
accounting principles.\132\
---------------------------------------------------------------------------

    \129\ Proposed Sec.  23.23(a)(14).
    \130\ Proposed Sec.  23.23(a)(1).
    \131\ Proposed Sec.  23.23(a)(11).
    \132\ Proposed Sec.  23.23(a)(21).
---------------------------------------------------------------------------

    Notably, a U.S. parent entity for purposes of the definition of SRS 
need not be a non-U.S. subsidiary's ultimate parent entity. The SRS 
definition would encompass U.S. parent entities that may be 
intermediate entities in a consolidated corporate family with an 
ultimate parent entity located outside the U.S. To differentiate 
between multiple possible U.S. parent entities, the Proposed Rule 
defines an ``ultimate U.S. parent entity'' for purposes of the 
significant subsidiary test. A non-U.S. person's ``ultimate U.S. parent 
entity'' would be the U.S. parent entity that is not a subsidiary of 
any other U.S. parent entity.\133\ Risk of a non-U.S. subsidiary that 
flows to its U.S. parent entity may not flow back out of the U.S. to a 
non-U.S. ultimate or intermediate parent entity. Because the risk may 
ultimately stop in the United States, it is appropriate for the 
Commission to base its SRS definition on whether a non-U.S. person has 
any U.S. parent entity, subject to certain risk-based thresholds.
---------------------------------------------------------------------------

    \133\ Proposed Sec.  23.23(a)(18).
---------------------------------------------------------------------------

3. Significant Risk Subsidiaries
    In addition to the definitions discussed above, whether an entity 
would be considered an SRS depends on the size of its ultimate U.S. 
parent entity, the significance of the subsidiary to its ultimate U.S. 
parent entity, and the regulatory oversight of its ultimate U.S. parent 
entity or the regulatory oversight of the non-U.S. subsidiary in the 
jurisdiction in which it is regulated.
    Under the Proposed Rule, the ultimate U.S. parent entity must 
exceed a $50 billion consolidated asset threshold. The Commission is 
proposing the $50 billion threshold in order to balance the 
Commission's interest in adequately overseeing those non-U.S. persons 
that may have a significant impact on their ultimate U.S. parent entity 
and, by extension, the U.S. financial system, with its interest in 
avoiding unnecessary burdens on those non-U.S. persons that would not 
have such an impact. The $50 billion threshold has been used in other 
contexts as a measure of large, complex institutions that may have 
systemic impacts on the U.S. financial system. For example, the 
Financial Stability Oversight Council (``FSOC'') initially used a $50 
billion total consolidated assets quantitative test as one threshold to 
apply to nonbank financial entities when assessing risks to U.S. 
financial stability.\134\ The Commission preliminarily believes that 
the $50 billion threshold provides an appropriate measure to limit the 
burden of the SRS definition to only those entities whose ultimate U.S. 
parent entity may pose a systemic risk to the U.S. financial system.
---------------------------------------------------------------------------

    \134\ See Authority to Require Supervision and Regulation of 
Certain Nonbank Financial Companies, Financial Stability Oversight 
Council, 77 FR 21637, 21643, 21661 (Apr. 2012). FSOC recently voted 
to remove the existing stage 1 quantitative metrics that included, 
among other metrics, the $50 billion threshold, because the metrics 
generated confusion among firms and members of the public and 
because they were not compatible with FSOC's new activities based 
approach to addressing risk to financial stability. See Authority to 
Require Supervision and Regulation of certain Nonbank Financial 
Companies (Dec. 4, 2019), available at https://home.treasury.gov/system/files/261/Interpretive-Guidance-on-Nonbank-Financial-Company-Determinations.pdf. However, the Commission preliminarily believes 
that the $50 billion total consolidated threshold remains an 
appropriate and workable measure to identify those ultimate U.S. 
parent entities that may have a significant impact on the U.S. 
financial system.
---------------------------------------------------------------------------

    In addition, before a non-U.S. subsidiary of an ultimate U.S. 
parent entity that meets the $50 billion consolidated asset threshold 
would be an SRS, the subsidiary would need to constitute a significant 
part of its ultimate U.S. parent entity. This concept of a 
``significant subsidiary'' borrows from the SEC's definition of 
``significant subsidiary'' in Regulation S-X, as well as the Federal 
Reserve Board in its financial statement filing requirements for 
foreign subsidiaries of U.S. banking organizations.\135\ The Commission 
believes it is appropriate to focus on only those subsidiaries that are 
significant to their ultimate U.S. parent entities, in order to capture 
those subsidiaries that have a significant impact on their large 
ultimate U.S. parent entities. In order to provide certainty to market 
participants as to what constitutes a significant subsidiary, the 
Proposed Rule includes a set of quantitative significance tests. 
Although not identical, the Commission notes that the SEC includes 
similar revenue and asset significance tests in its definition of 
significant subsidiary in Regulation S-X.\136\ The Commission believes 
that, in this case, in order to determine whether a subsidiary meets 
such significance, it is appropriate to measure the significance of a 
subsidiary's equity capital, revenue, and assets relative to its 
ultimate U.S. parent entity.
---------------------------------------------------------------------------

    \135\ See e.g., Instructions for Preparation of Financial 
Statements of Foreign Subsidiaries of U.S. Banking Organizations FR 
2314 and FR 2314S, at GEN-2 (Sept. 2016), available at https://
www.federalreserve.gov/reportforms/forms/FR_2314_
FR_2314S20190331_i.pdf (``FR 2314 and FR 2314S Instructions'') 
(identifying equity capital significance test applicable to 
subsidiaries). See also SEC rule 210.1-02(w), 17 CFR 210.1-02(w) 
(identifying asset and income significance tests applicable in 
definition of significant subsidiaries).
    \136\ 17 CFR 210.1-02(w)(1)-(3) (setting out a ten percent 
significance threshold with respect to total assets and income).
---------------------------------------------------------------------------

    Under the Proposed Rule, the term ``significant subsidiary'' would 
mean a subsidiary, including its subsidiaries, where: (1) The three 
year rolling average of the subsidiary's equity capital is equal to or 
greater than five percent of the three year rolling average of its 
ultimate U.S. parent entity's consolidated equity capital, as 
determined in accordance with U.S. GAAP at the end of the most recently 
completed fiscal year (the ``equity capital significance test''); (2) 
the three year rolling average of the subsidiary's revenue is equal to 
or greater than ten percent of the three year rolling average of its 
ultimate U.S. parent entity's consolidated revenue, as determined in 
accordance with U.S. GAAP at the end of the most recently completed 
fiscal year (the ``revenue significance test''); or (3) the three year 
rolling average of the subsidiary's assets are equal to or greater than 
ten percent of the three year rolling average of its ultimate U.S. 
parent entity's consolidated assets, as determined in accordance with 
U.S. GAAP at the end of the most recently completed fiscal year (the 
``asset significance test''). For the proposed equity capital 
significance test, equity capital would include perpetual

[[Page 966]]

preferred stock, common stock, capital surplus, retained earnings, 
accumulated other comprehensive income and other equity capital 
components and should be calculated in accordance with U.S. GAAP.
    The Proposed Rule would cause an entity to be a significant 
subsidiary only if it passes at least one of these significance tests. 
The Commission preliminarily believes that the equity capital test is 
an appropriate measure of a subsidiary's significance to its ultimate 
U.S. parent entity and notes its use in the context of financial 
statement reporting of foreign subsidiaries.\137\ The Commission also 
preliminarily believes that if a subsidiary constitutes more than ten 
percent of its ultimate U.S. parent entity's assets or revenue, it is 
of significant importance to its ultimate U.S. parent entity such that 
swap activity by the subsidiary may have a material impact on its 
ultimate U.S. parent entity and, consequently, the U.S. financial 
system. The Commission is proposing to use a three year rolling average 
throughout its proposed significance tests in order to mitigate the 
potential for an entity to frequently change from being deemed a 
significant subsidiary and not being deemed a significant subsidiary 
based on fluctuations in its share of equity capital, revenue, or 
assets of its ultimate U.S. parent entity. The Commission preliminarily 
believes that if a subsidiary satisfies any one of the three 
significance tests proposed here, then it is of sufficient significance 
to its ultimate U.S. parent entity, which under proposed Sec.  
23.23(a)(12) has consolidated assets of more than $50 billion, to 
warrant the application of requirements addressed by the Proposed Rule 
if such subsidiary otherwise meets the definition of SRS.
---------------------------------------------------------------------------

    \137\ FR 2314 and FR 2314S Instructions, at Gen-2.
---------------------------------------------------------------------------

4. Exclusions From the Definition of SRS
    As indicated above, under the Proposed Rule, a non-U.S. person 
would not be an SRS to the extent the entity is subject to prudential 
regulation as a subsidiary of a U.S. BHC or is subject to comparable 
capital and margin standards. An entity that meets either of those two 
exceptions, in the Commission's preliminary view, would be subject to a 
level of regulatory oversight that is sufficiently comparable to the 
Dodd-Frank Act swap regime with respect to prudential oversight. Non-
U.S. subsidiaries that are part of BHCs are already subject to 
consolidated supervision and regulation by the Federal Reserve 
Board,\138\ including with respect to capital and risk management 
requirements, and therefore their swap activity poses less risk to the 
financial position and risk profile of the ultimate U.S. parent entity, 
and thus less risk to the U.S. financial system than the swap activity 
of a non-U.S. subsidiary of an ultimate U.S. parent entity that is a 
not a BHC. In this case, the Commission preliminarily believes 
deference to the foreign regulatory regime would be appropriate because 
the swap activity is occurring within an organization that is under the 
umbrella of U.S. prudential regulation with certain regulatory 
protections already in place.\139\
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    \138\ See e.g., Board of Governors of the Federal Reserve 
System, Bank Holding Company Supervision Manual, section 2100.0.1 
Foreign Operations of U.S. Banking Organizations, available at 
https://www.federalreserve.gov/publications/files/bhc.pdf (``The 
Federal Reserve has broad discretionary powers to regulate the 
foreign activities of member banks and bank holding companies (BHCs) 
so that, in financing U.S. trade and investments abroad, these U.S. 
banking organizations can be competitive with institutions of the 
host country without compromising the safety and soundness of their 
U.S. operations.''); FR 2314 and FR 2314S Instructions, at GEN 2.
    \139\ Proposed Sec.  23.23(a)(12)(i).
---------------------------------------------------------------------------

    Similarly, in the case of entities that are subject to capital 
standards and oversight by their home country regulators that are 
consistent with Basel III and subject to a CFTC Margin Determination, 
the Commission preliminarily believes that it is appropriate for the 
Commission to defer to the home country regulator.\140\ For purposes of 
determining whether proposed Sec.  23.23(a)(12)(ii) would apply, the 
Commission intends for persons to independently assess whether they 
reside in a jurisdiction that has capital standards that are consistent 
with Basel III.\141\ In such cases where entities are subject to 
capital standards and oversight by their home country regulators that 
are consistent with Basel III and subject to a CFTC Margin 
Determination, the Commission preliminarily believes that the potential 
risk that the entity might pose to the U.S. financial system would be 
adequately addressed through these capital and margin requirements. 
Further, such an approach is consistent with the Commission's desire to 
show deference to non-U.S. regulators whose requirements are comparable 
to the CFTC's requirements. For margin purposes, the Commission has 
issued a number of determinations that entities can look to in order to 
determine if they satisfy this aspect of the exception.\142\ For 
capital standards and oversight consistent with Basel III, entities 
should look to whether the BIS has determined the jurisdiction is in 
compliance as of the relevant Basel Committee on Banking Supervision 
deadline set forth in its most recent progress report.\143\ The 
Commission preliminarily believes that it is appropriate to except 
these entities from the definition of SRS, in large part, because the 
swaps entered into by such entities are already subject to significant 
regulation, either by the Federal Reserve Board or by the entity's home 
country.
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    \140\ Proposed Sec.  23.23(a)(12)(ii).
    \141\ Discussion regarding the Basel framework is available at 
https://www.bis.org/bcbs/basel3.htm.
    \142\ See Comparability Determination for Japan: Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 81 FR 63376 (Sep. 15, 2016); Comparability 
Determination for the European Union: Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants, 82 FR 
48394 (Oct. 13, 2017) (``Margin Comparability Determination for the 
European Union''); Amendment to Comparability Determination for 
Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants, 84 FR 12074 (Apr. 1, 2019); and 
Comparability Determination for Australia: Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 
12908 (Apr. 3, 2019). Further, on April 5, 2019, DSIO and the 
Division of Market Oversight issued a letter jointly to provide 
time-limited no-action relief in connection with, among other 
things, the Margin Comparability Determination for the European 
Union, in order to account for the anticipated withdrawal of the 
United Kingdom from the European Union. See CFTC Staff Letter 19-08, 
No-Action Relief in Connection With Certain Previously Granted 
Commission Determinations and Exemptions, in Order to Account for 
the Anticipated Withdrawal of the United Kingdom From the European 
Union (Apr. 5, 2019), available at https://www.cftc.gov/csl/19-08/download.
    \143\ The most current report was issued in October 2019. Basel 
Committee on Banking Supervision, Seventeenth progress report on 
adoption of the Basel regulatory framework (October 2019), available 
at https://www.bis.org/bcbs/publ/d478.pdf. Current and historical 
reports are available at https://www.bis.org/bcbs/implementation/rcap_reports.htm?m=3%7C14%7C656%7C59.
---------------------------------------------------------------------------

    As noted above, if a non-U.S. subsidiary of an ultimate U.S. parent 
entity does not fall into either of the exceptions in proposed 
Sec. Sec.  23.23(a)(12)(i)-(ii), the Proposed Rule would classify the 
subsidiary as a SRS only if its ultimate U.S. parent entity has more 
than $50 billion in global consolidated assets and if the subsidiary 
meets the definition of a significant subsidiary, set forth in proposed 
Sec.  23.23(a)(13).
    The Commission is requesting comment below on the proposed 
definitions discussed in this section.

D. Foreign Branch and Swap Conducted Through a Foreign Branch

    Under the Proposed Rule, the term ``foreign branch'' would mean an 
office of a U.S. person that is a bank that: (1)

[[Page 967]]

Is located outside the United States; (2) operates for valid business 
reasons; (3) maintains accounts independently of the home office and of 
the accounts of other foreign branches, with the profit or loss accrued 
at each branch determined as a separate item for each foreign branch; 
and (4) is engaged in the business of banking or finance and is subject 
to substantive regulation in banking or financing in the jurisdiction 
where it is located.\144\
---------------------------------------------------------------------------

    \144\ Proposed Sec.  23.23(a)(2).
---------------------------------------------------------------------------

    The Commission believes that the factors listed in the proposed 
definition are appropriate for determining when an entity would be 
considered a foreign branch for purposes of the Proposed Rule.\145\ The 
requirement that the foreign branch be located outside of the United 
States is consistent with the stated goal of identifying certain swap 
activity that is not conducted within the United States. The 
requirements that the foreign branch maintain accounts independent of 
the U.S. entity, operate for valid business reasons, and be engaged in 
the business of banking or finance and be subject to substantive 
banking or financing regulation in its non-U.S. jurisdiction are also 
intended to prevent evasion of the Dodd-Frank Act requirements.\146\ In 
particular, these requirements address the concern that an entity would 
set up operations outside the United States in a jurisdiction without 
substantive banking or financial regulation to evade Dodd-Frank Act 
requirements and CFTC regulations.\147\ The Commission notes that this 
proposed definition incorporates concepts from the Federal Reserve 
Board's Regulation K,\148\ the FDIC International Banking 
Regulation,\149\ and the Office of the Comptroller of the Currency's 
``foreign branch'' definition.\150\
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    \145\ As discussed below in sections III.B.2 and IV.B.2, the 
Proposed Rule would not require an Other Non-U.S. Person to count 
toward its de minimis threshold calculations swaps conducted through 
a foreign branch of a registered U.S. SD.
    \146\ The Commission notes that national banks operating foreign 
branches are required under section 25 of the Federal Reserve Act 
(``FRA'') to conduct the accounts of each foreign branch 
independently of the accounts of other foreign branches established 
by it and of its home office, and are required at the end of each 
fiscal period to transfer to its general ledger the profit or loss 
accrued at each branch as a separate item. 12 U.S.C. 604. The FRA is 
codified at 12 U.S.C. 221 et seq.
    \147\ As discussed below, the Commission is concerned that the 
material terms of a swap would be negotiated or agreed to by 
employees of the U.S. bank that are located in the United States and 
then be routed to a foreign branch so that the swap would be treated 
as a swap with the foreign branch for purposes of the SD and MSP 
registration thresholds or for purposes of certain regulatory 
requirements applicable to registered SDs or MSPs.
    \148\ Regulation K is a regulation issued by the Board of 
Governors of the Federal Reserve (``Federal Reserve Board'') under 
the authority of the FRA; the Bank Holding Company Act of 1956 
(``BHC Act'') (12 U.S.C. 1841 et seq.); and the International 
Banking Act of 1978 (``IBA'') (12 U.S.C. 3101 et seq.). Regulation K 
sets forth rules governing the international and foreign activities 
of U.S. banking organizations, including procedures for establishing 
foreign branches to engage in international banking. 12 CFR part 
211. Under Regulation K, a ``foreign branch'' is defined as ``an 
office of an organization (other than a representative office) that 
is located outside the country in which the organization is legally 
established and at which a banking or financing business is 
conducted.'' 12 CFR 211.2(k).
    \149\ 12 CFR part 347 is a regulation issued by the Federal 
Deposit Insurance Corporation under the authority of the Federal 
Deposit Insurance Act (12 U.S.C. 1828(d)(2)), which sets forth rules 
governing the operation of foreign branches of insured state 
nonmember banks (``FDIC International Banking Regulation''). Under 
12 CFR 347.102(j), a ``foreign branch'' is defined as an office or 
place of business located outside the United States, its 
territories, Puerto Rico, Guam, American Samoa, the Trust Territory 
of the Pacific Islands, or the Virgin Islands, at which banking 
operations are conducted, but does not include a representative 
office.
    \150\ 12 CFR 28.2 (defining ``foreign branch'' as an office of a 
national bank (other than a representative office) that is located 
outside the United States at which banking or financing business is 
conducted).
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    The proposed definition of ``foreign branch'' is also consistent 
with the SEC's approach, which, for purposes of security-based swap 
dealer regulation, defined foreign branch as any branch of a U.S. bank 
that: (1) Is located outside the United States; (2) operates for valid 
business reasons; and (3) is engaged in the business of banking and is 
subject to substantive banking regulation in the jurisdiction where 
located.\151\ The Commission's intention is to ensure that the 
definition provides sufficient clarity as to what constitutes a 
``foreign branch''--specifically, an office outside of the U.S. that 
has independent accounts from the home office and other branches--while 
striving for greater regulatory harmony with the SEC.\152\
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    \151\ See 17 CFR 240.3a71-3(a)(2).
    \152\ The Commission also notes that the factors listed in the 
Proposed Rule are similar to the approach described in the Guidance, 
which stated that the foreign branch of a U.S. swap entity is an 
entity that is: (1) Subject to Regulation K or the FDIC 
International Banking Regulation, or otherwise designated as a 
``foreign branch'' by the U.S. bank's primary regulator; (2) 
maintains accounts independently of the home office and of the 
accounts of other foreign branches with the profit or loss accrued 
at each branch determined as a separate item for each foreign 
branch; and (3) subject to substantive regulation in banking or 
financing in the jurisdiction where it is located. See Guidance, 78 
FR at 45329.
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    The Commission notes that a foreign branch would not include an 
affiliate of a U.S. bank that is incorporated or organized as a 
separate legal entity.\153\ For similar reasons, the Commission 
declines in the Proposed Rule to recognize foreign branches of U.S. 
persons separately from their U.S. principal for purposes of 
registration.\154\ That is, if the foreign branch engages in swap 
activity in excess of the relevant SD or MSP registration thresholds, 
as discussed further below, the U.S. person would be required to 
register, and the registration would encompass the foreign branch. 
However, upon consideration of principles of international comity and 
the factors set forth in the Restatement, rather than broadly excluding 
foreign branches from the U.S. person definition, the Commission is 
proposing to calibrate the requirements for counting certain swaps 
entered into through a foreign branch, as described in sections III.B.2 
and IV.B.2, and proposing to calibrate the requirements otherwise 
applicable to foreign branches of a registered U.S. SD, as discussed in 
section VI. Among the benefits, as discussed below, would be to enable 
foreign branches of U.S. banks to have greater access to foreign 
markets.
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    \153\ This is similar to the approach described in the Guidance. 
See Guidance, 78 FR at 45328-29.
    \154\ This is similar to the approach described in the Guidance. 
See id. at 45315, 45328-29.
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    Under the Proposed Rule, the term ``swap conducted through a 
foreign branch'' would mean a swap entered into by a foreign branch 
where: (1) The foreign branch or another foreign branch is the office 
through which the U.S. person makes and receives payments and 
deliveries under the swap pursuant to a master netting or similar 
trading agreement, and the documentation of the swap specifies that the 
office for the U.S. person is such foreign branch; (2) the swap is 
entered into by such foreign branch in its normal course of business; 
and (3) the swap is reflected in the local accounts of the foreign 
branch.\155\
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    \155\ Proposed Sec.  23.23(a)(16).
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    The Commission believes that this definition identifies the type of 
swap activity for which the foreign branch performs key dealing 
functions outside the United States. Because a foreign branch of a U.S. 
bank is not a separate legal entity, the first prong of the definition 
clarifies that the foreign branch must be the office of the U.S. bank 
through which payments and deliveries under the swap must be made. This 
approach is consistent with the standard ISDA Master Agreement, which 
requires that each party specify an ``office'' for each swap, which is 
where a party ``books'' a swap and/or the office through which the 
party makes and receives payments and deliveries.\156\
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    \156\ The ISDA Master Agreement defines ``office'' as a branch 
or office of a party, which may be such party's head or home office. 
See 2002 ISDA Master Agreement, available at https://www.isda.org/book/2002-isda-master-agreement-english/library.

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[[Page 968]]

    The second prong of the definition (whether the swap is entered 
into by such foreign branch in the normal course of business) is 
intended as an anti-evasion measure to prevent a U.S. bank from simply 
routing swaps for booking in a foreign branch so that the swap would be 
treated as a swap conducted through a foreign branch for purposes of 
the SD and MSP registration thresholds or for purposes of certain 
regulatory requirements applicable to registered SDs or MSPs. To 
satisfy this prong, it must be the normal course of business for 
employees located in the branch (or another foreign branch of the U.S. 
bank) to enter into the type of swap in question. The Commission 
preliminarily believes that this requirement would not prevent 
personnel of the U.S. bank located in the U.S. from participating in 
the negotiation or execution of the swap so long the swaps that are 
booked in the foreign branch are primarily entered into by personnel 
located in the branch (or another foreign branch of the U.S. bank).
    With respect to the third prong, the Commission believes that where 
a swap is with the foreign branch of a U.S. bank, it generally would be 
reflected in the foreign branch's accounts.\157\
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    \157\ This proposed definition is generally consistent with the 
definition under the Guidance. See Guidance, 78 FR at 45330. 
However, the Commission notes that the proposed definition of 
``foreign branch'' does not include the requirement that the 
employees negotiating and agreeing to the terms of the swap (or, if 
the swap is executed electronically, managing the execution of the 
swap), other than employees with functions that are solely clerical 
or ministerial, be located in such foreign branch or in another 
foreign branch of the U.S. bank. The Commission is of the view that, 
as discussed above, the second prong of the proposed definition 
addresses this issue.
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E. Swap Entity, U.S. Swap Entity, and Non-U.S. Swap Entity

    Under the Proposed Rule, the term ``swap entity'' would mean a 
person that is registered with the Commission as a SD or MSP pursuant 
to the CEA.\158\ In addition, the Commission is proposing to define 
``U.S. swap entity'' as a swap entity that is a U.S. person,\159\ and 
``non-U.S. swap entity'' as a swap entity that is not a U.S swap 
entity.\160\
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    \158\ Proposed Sec.  23.23(a)(15).
    \159\ Proposed Sec.  23.23(a)(23).
    \160\ Proposed Sec.  23.23(a)(10).
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F. U.S. Branch and Swap Conducted Through a U.S. Branch

    Under the Proposed Rule, the term ``U.S. branch'' would mean a 
branch or agency of a non-U.S. banking organization where such branch 
or agency: (1) Is located in the United States; (2) maintains accounts 
independently of the home office and other U.S. branches, with the 
profit or loss accrued at each branch determined as a separate item for 
each U.S. branch; and (3) engages in the business of banking and is 
subject to substantive banking regulation in the state or district 
where located.\161\ The term ``swap conducted through a U.S. branch'' 
would mean a swap entered into by a U.S. branch where: (1) The U.S. 
branch is the office through which the non-U.S. person makes and 
receives payments and deliveries under the swap pursuant to a master 
netting or similar trading agreement, and the documentation of the swap 
specifies that the office for the non-U.S. person is such U.S. branch; 
or (2) the swap is reflected in the local accounts of the U.S. 
branch.\162\
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    \161\ Proposed Sec.  23.23(a)(20).
    \162\ Proposed Sec.  23.23(a)(17).
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    Similar to how the terms ``foreign branch'' and ``conducted through 
a foreign branch'' are used under the Proposed Rule to identify swap 
activity of U.S. entities that is taking place outside the United 
States and, thus, may be eligible for certain relief from the 
Commission's requirements under the Proposed Rule, these definitions 
would be used to identify swap activity that the Commission believes 
should be considered to take place in the United States and, thus, 
remain subject to the Commission's requirements addressed in the 
Proposed Rule, as discussed below with respect to the definitions of 
``foreign-based swap'' and ``foreign counterparty.'' In particular, 
these proposed definitions are intended to address the concern that an 
entity would operate outside the United States to evade Dodd-Frank Act 
requirements and CFTC regulations for a swap while still benefiting 
from the swap taking place in the United States. The Commission 
preliminarily believes that the requirements listed in the proposed 
definitions are appropriate to identify swaps of a non-U.S. banking 
organization operating through a foreign branch in the United States 
that should remain subject to Commission requirements addressed in the 
Proposed Rule.
    Consistent with the Commission's proposed approach to foreign 
branches, a U.S. branch of a non-U.S. banking organization would not 
include a U.S. affiliate of the organization that is incorporated or 
organized as a separate legal entity. Also consistent with this 
approach, the Commission declines in the Proposed Rule to recognize 
U.S. branches of non-U.S. banking organization separately from their 
non-U.S. principal for purposes of registration.

G. Foreign-Based Swap and Foreign Counterparty

    Under the Proposed Rule, the term ``foreign-based swap'' would 
mean: (1) A swap by a non-U.S. swap entity, except for a swap conducted 
through a U.S. branch; or (2) a swap conducted through a foreign 
branch.\163\ The term ``foreign counterparty'' would mean: (1) A non-
U.S. person, except with respect to a swap conducted through a U.S. 
branch of that non-U.S. person; or (2) a foreign branch where it enters 
into a swap in a manner that satisfies the definition of a swap 
conducted through a foreign branch.\164\ Together with the proposed 
defined terms ``foreign branch,'' ``swap conducted through a foreign 
branch,'' ``U.S. branch,'' and ``swap conducted through a U.S. branch'' 
discussed above, these terms would be used to determine which swaps the 
Commission considers to be foreign swaps of non-U.S. swap entities and 
foreign branches of U.S. swap entities for which certain relief from 
Commission requirements would be available under the Proposed Rule, and 
which swaps should be treated as domestic swaps not eligible for such 
relief. The Commission is proposing to limit the types of swaps that 
are eligible for relief, consistent with section 2(i) of the CEA, to 
address its concern that swaps that demonstrate sufficient indicia of 
being domestic remain subject to the Commission's requirements 
addressed by the Proposed Rule, notwithstanding that the swap is 
entered into by a non-U.S. swap entity or a foreign branch of a U.S. 
swap entity. Otherwise, the Commission is concerned that an entity or 
branch might simply be established outside of the United Stated to 
evade Dodd-Frank Act requirements and CFTC regulations.
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    \163\ Proposed Sec.  23.23(a)(4).
    \164\ Proposed Sec.  23.23(a)(3).
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    As the Commission has previously stated, it has a strong 
supervisory interest in regulating swap activities that occur in the 
United States.\165\ In addition, consistent with section 2(i) of the 
CEA, the Commission believes that foreign swaps of non-U.S. swap 
entities and foreign branches of U.S. swap entities should be eligible 
for relief from certain of the Commission's requirements. Accordingly, 
certain portions of the Commission's proposed substituted compliance 
regime, as well as its proposed exceptions from certain requirements in 
CFTC regulations (each discussed below in section VI), are

[[Page 969]]

designed to be limited to certain foreign swaps of non-U.S. swap 
entities and foreign branches of U.S. swap entities that the Commission 
believes should be treated as occurring outside the United States. 
Specifically, these provisions are applicable only to a swap by a non-
U.S. swap entity, except for a swap conducted through a U.S. branch, 
and a swap conducted through a foreign branch such that it would 
satisfy the definition of a ``foreign-based swap'' above. They are not 
applicable to swaps of non-U.S. swap entities that are conducted 
through a U.S. branch of that swap entity, and swaps of foreign 
branches of U.S. swap entities where the foreign branch does not enter 
into the swaps in a manner that satisfies the definition of a swap 
conducted through a foreign branch, because, in the Commission's view, 
the entrance into a swap by a U.S. swap entity (through its foreign 
branch) or a U.S. branch of a non-U.S. swap entity under these 
circumstances, demonstrates sufficient indicia of being a domestic swap 
to be treated as such for purposes of the Proposed Rule.\166\ 
Similarly, in certain cases, the availability of a proposed exception 
or substituted compliance for a swap would depend on whether the 
counterparty to such a swap qualifies as a ``foreign counterparty'' 
under the Proposed Rule. The Commission is proposing this requirement 
to ensure that foreign-based swaps of swap entities in which their 
counterparties demonstrate sufficient indicia of being domestic and, 
thus, trigger the Commission's supervisory interest in domestic swaps, 
continue to be subject to the Commission requirements addressed in the 
Proposed Rule.
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    \165\ See Guidance, 78 FR at 45350, n.513.
    \166\ The Commission notes that the Guidance took a similar 
approach with respect to U.S. branches of non-U.S. SDs or MSPs, 
stating that they would be subject to the transaction-level 
requirements (discussed in section VI.A below), without substituted 
compliance. Id.
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    The Commission also notes that its approach in the Proposed Rule 
for U.S. branches of non-U.S. swap entities is parallel to the 
Commission's approach in the Proposed Rule to provide certain 
exceptions from Commission requirements or substituted compliance for 
transactions of foreign branches of U.S. swap entities to take into 
account the supervisory interest of local regulators, as discussed 
below in section VI.

H. Request for Comment

    The Commission invites comment on all aspects of the Proposed Rule, 
including each of the definitions discussed above, and specifically 
requests comments on the following questions. Please explain your 
responses and provide alternatives to the relevant portions of the 
Proposed Rule, where applicable.
    (1) The ``U.S. person'' definition the Commission is proposing here 
aligns with the definition of that term adopted by the SEC in the 
context of its cross-border swap regulations. Should the Commission 
instead adopt the U.S. person definition used in its Cross-Border 
Margin Rule? Alternatively, should the Commission instead harmonize the 
``U.S. person'' definition in the Proposed Rule to the interpretation 
of U.S. person included in the Guidance?
    (2) Is it appropriate, as proposed, that commodity pools, pooled 
accounts, investment funds, or other CIVs that are majority-owned by 
U.S. persons not be included in the proposed definition of ``U.S. 
person''? Would a majority of such funds or CIVs be subject to margin 
requirements of foreign jurisdictions? Is it accurate to assume that 
the exposure of investors to losses in CIVs is generally capped at 
their investment amount? Does tracking a CIV's beneficial ownership 
pose challenges in certain circumstances?
    (3) When determining the principal place of business for a CIV, 
should the Commission consider including as a factor whether the senior 
personnel responsible for the formation and promotion of the CIV are 
located in the United States, similar to the approach in the Cross-
Border Margin Rule? \167\
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    \167\ See Cross-Border Margin Rule, 81 FR at 34823.
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    (4) Should the Commission include an unlimited U.S. responsibility 
prong in the definition of ``U.S. person''? If not, should the 
Commission revise its interpretation of ``guarantee'' in a manner 
consistent with the SEC to ensure that persons that would otherwise be 
considered U.S. persons pursuant to the unlimited U.S. responsibility 
prong would nonetheless be considered entities with guarantees from a 
U.S. person? Are there any persons that would be captured under the 
unlimited U.S. responsibility prong?
    (5) Should the ``U.S. person'' definition include a catch-all 
provision? What types of entities would be expected to fall under such 
a provision?
    (6) Should the Commission consider providing an exemption from the 
``U.S. person'' definition for pension plans organized in the U.S. that 
are primarily for the benefit of the foreign employees of U.S.-based 
entities, consistent with the Cross-Border Margin Rule's ``U.S. 
person'' definition? \168\
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    \168\ See 17 CFR 23.260(a)(10)(iv).
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    (7) Should the catch-all provision for international financial 
institutions be restricted to organizations in which the U.S. 
government is a shareholder?
    (8) Does the proposed SRS definition appropriately capture persons 
that raise greater supervisory concerns relative to Other Non-U.S. 
Persons whose swap obligations are not guaranteed by a U.S. person? If 
not, how should the definition be revised? Is $50 billion an 
appropriate threshold to determine when an ultimate U.S. parent entity 
may have a significant impact on the U.S. financial system?
    (9) Should the Commission consider alternative or additional tests 
for whether a person would be a significant subsidiary or an SRS? Would 
an alternate approach to the use of a three year rolling average 
throughout the proposed significance tests more effectively mitigate 
the risk of an entity frequently varying between being a significant 
subsidiary and not being a significant subsidiary?
    (10) Should the exclusion set out in proposed Sec.  23.23(a)(12)(i) 
include any entity that is subject to consolidated supervision and 
regulation by the Federal Reserve Board rather than being limited to 
subsidiaries of BHCs (for example, intermediate holding companies of 
foreign banking organizations that are subject to supervision by the 
Federal Reserve Board)?
    (11) Does the proposed definition of ultimate U.S. parent entity 
adequately account for affiliated entity structures with multiple U.S. 
parent entities? Are there situations where the proposed ultimate U.S. 
parent entity definition would result in more than one ultimate U.S. 
person entity being identified?
    (12) Are the proposed tests for compliance with Basel III capital 
standards and compliance with margin requirements in a comparable 
jurisdiction appropriate? What are alternative ways for a person to 
confirm it is compliant with Basel III capital standards?
    (13) In the interests of harmonizing with the SEC, should the 
Commission use the concept of ``conduit affiliate,'' as in 17 CFR 
240.3a71-3(a)(1), instead of the concept of SRS? \169\ Or should the

[[Page 970]]

Commission address both conduit affiliates and SRSs in its cross-border 
rules?
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    \169\ The Commission notes that the Guidance included the 
concept of a ``conduit affiliate.'' Although the Commission did not 
define the concept of a ``conduit affiliate'' it did identify 
certain factors it believed were relevant to the determination of 
whether an entity would be considered a conduit affiliate of a U.S. 
person. See Guidance, 78 FR at 45359. The Commission, in this 
Proposed Rule, is not separately including the concept of a 
``conduit affiliate'' because the concerns posed by a conduit 
affiliate are intended to be addressed through the proposed 
definition and treatment of SRSs.
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    (14) Should the definition of ``foreign branch'' include the 
requirement that the branch be ``subject to substantive regulation in 
banking or financing in the jurisdiction where it is located,'' given 
that the definition of ``foreign branch'' under Regulation K does not 
contain such a requirement? Similarly, should the definition of ``U.S. 
branch'' include the requirement that the branch be ``subject to 
substantive banking regulation in the state or district where 
located''?
    (15) Should the definitions of ``foreign branch'' and ``swap 
conducted through a foreign branch'' be further harmonized with the 
definition of ``foreign branch'' by the SEC in rule 3a71-3(a)(2) under 
the Exchange Act and the definition of ``transaction conducted through 
a foreign branch'' by the SEC in rule 3a71-3(a)(3) under the Securities 
Exchange Act? \170\ Should the Commission instead use the definitions 
of those terms in the Guidance? \171\ The Commission proposes that a 
swap will be deemed to be entered into by such foreign branch in the 
normal course of business if swaps of the type in question are 
primarily, but not exclusively, entered into by personnel located in 
the branch (or another foreign branch of the U.S. bank). Should the 
Commission instead stipulate that a swap will be considered to be 
``entered into by such foreign branch in the normal course of 
business'' only if personnel located in the U.S. do not participate in 
the negotiation or execution of such swap? Should the Commission 
instead take an alternative approach? If so, what should it be?
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    \170\ The SEC defined the term ``foreign branch'' in Exchange 
Act rule 3a71-3(a)(2), 17 CFR 240.3a71- 3(a)(2), to mean any branch 
of a U.S. bank if: (1) The branch is located outside the United 
States; (2) the branch operates for valid business reasons; and (3) 
the branch is engaged in the business of banking and is subject to 
substantive banking regulation in the jurisdiction where located. 
The SEC defined the term ``transaction conducted through a foreign 
branch'' in Exchange Act rule 3a71-3(a)(3), 17 CFR 240.3a71-3(a)(3), 
to mean a security-based swap transaction that is arranged, 
negotiated, and executed by a U.S. person through a foreign branch 
of such U.S. person if: (1) The foreign branch is the counterparty 
to such security-based swap transaction; and (2) the security-based 
swap transaction is arranged, negotiated, and executed on behalf of 
the foreign branch solely by persons located outside the United 
States. See also SEC Cross-Border Rule, 79 FR 47278.
    \171\ See Guidance, 78 FR at 45328-31 (discussing that scope of 
the term ``foreign branch'' and the Commission's consideration of 
whether a swap with a foreign branch of a U.S. bank by a non-U.S. 
person should count toward the non-U.S. person's de minimis 
threshold calculation).
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    (16) Should the definitions of ``foreign branch'' and ``U.S. 
branch'' be restricted to entities engaged in the business of banking 
and/or finance and subject to substantive regulation in banking and/or 
finance? If not, what other types of entities should be considered 
branches?
    (17) Are the definitions of ``U.S. branch'' and ``swap conducted 
through a U.S. branch'' effective to appropriately capture transactions 
that should be considered to be domestic rather than foreign, such that 
they are ineligible for certain exceptions from the group B and group C 
requirements and substituted compliance for the group B requirements 
(discussed in section VI below)? If not, what changes should be made to 
the definitions?
    (18) Are the definitions of ``foreign-based swap,'' ``foreign 
branch,'' ``foreign counterparty,'' and ``swap conducted through a 
foreign branch'' effective to appropriately capture transactions that 
should be considered to be foreign rather than domestic, such that they 
are eligible for certain exceptions from the group B and group C 
requirements and substituted compliance for the group B requirements 
(discussed in section VI below)? If not, what changes should be made to 
the definitions?

III. Cross-Border Application of the Swap Dealer Registration Threshold

    CEA section 1a(49) defines the term ``swap dealer'' to include any 
person that: (1) Holds itself out as a dealer in swaps; (2) makes a 
market in swaps; (3) regularly enters into swaps with counterparties as 
an ordinary course of business for its own account; or (4) engages in 
any activity causing the person to be commonly known in the trade as a 
dealer or market maker in swaps (collectively referred to as ``swap 
dealing,'' ``swap dealing activity,'' or ``dealing activity'').\172\ 
The statute also requires the Commission to promulgate regulations to 
establish factors with respect to the making of a determination to 
exempt from designation as an SD an entity engaged in a de minimis 
quantity of swap dealing.\173\
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    \172\ 7 U.S.C. 1a(49)(A). In general, a person that satisfies 
any one of these prongs is deemed to be engaged in swap dealing 
activity.
    \173\ 7 U.S.C. 1a(49)(D).
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    In accordance with CEA section 1a(49), the Commission issued the 
Entities Rule,\174\ which, among other things, further defined the term 
``swap dealer'' and excluded from designation as an SD any entity that 
engages in a de minimis quantity of swap dealing with or on behalf of 
its customers.\175\ Specifically, the definition of ``swap dealer'' in 
Sec.  1.3 provides that a person shall not be deemed to be an SD as a 
result of its swap dealing activity involving counterparties unless, 
during the preceding 12 months, the aggregate gross notional amount of 
the swap positions connected with those dealing activities exceeds the 
de minimis threshold.\176\ Paragraph (4) of that definition further 
requires that, in determining whether its swap dealing activity exceeds 
the de minimis threshold, a person must include the aggregate gross 
notional value of the swaps connected with the dealing activities of 
its affiliates under common control.\177\ For purposes of the Proposed 
Rule, the Commission construes ``affiliates under common control'' by 
reference to the Entities Rule, which defined control as the 
possession, direct or indirect, of the power to direct or cause the 
direction of the management and policies of a person, whether through 
the ownership of voting securities, by contract or otherwise.\178\ 
Accordingly, any reference in the Proposed Rule to ``affiliates under 
common control'' with a person would include affiliates that are 
controlling, controlled by, or under common control with such person.
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    \174\ Entities Rule, 77 FR 30596.
    \175\ See 17 CFR 1.3, Swap dealer, paragraph (4); Entities Rule, 
77 FR 30596.
    \176\ See 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A). The de 
minimis threshold is set at $8 billion, except with regard to swaps 
with special entities for which the threshold is $25 million. See De 
Minimis Exception to the Swap Dealer Definition, 83 FR 56666 (Nov. 
13, 2018).
    \177\ See 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A).
    \178\ See Entities Rule, 77 FR at 30631 n.437.
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    The Commission is now proposing rules to address how the de minimis 
threshold should apply to the cross-border swap dealing transactions of 
U.S. and non-U.S. persons. Specifically, the Proposed Rule identifies 
when a potential SD's cross-border dealing activities should be 
included in its de minimis threshold calculation and when they may 
properly be excluded. As discussed below, whether a potential SD would 
include a particular swap in its de minimis threshold calculation would 
depend on how the entity is classified (e.g., U.S. person, SRS, etc.) 
and, in some cases, the jurisdiction in which a non-U.S. person is 
regulated.

A. U.S. Persons

    Under the Proposed Rule, consistent with the Guidance,\179\ a U.S. 
person would include all of its swap dealing transactions in its de 
minimis threshold

[[Page 971]]

calculation without exception.\180\ As discussed in section II.A above, 
the term ``U.S. person'' would encompass a person that, by virtue of 
being domiciled, organized, or having its principal place of business 
in the United States, raises the concerns intended to be addressed by 
the Dodd-Frank Act, regardless of the U.S. person status of its 
counterparty. In addition, a person's status as a U.S. person would be 
determined at the entity level and, thus, a U.S. person would include 
the swap dealing activity of operations that are part of the same legal 
person, including those of its foreign branches. Therefore, a U.S. 
person would include in its SD de minimis threshold calculation dealing 
swaps entered into by a foreign branch of the U.S. person.\181\
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    \179\ See Guidance, 78 FR at 45326.
    \180\ Proposed Sec.  23.23(b)(1).
    \181\ The Commission notes that this approach mirrors the SEC's 
approach in its cross-border rule. See 17 CFR 240.3a71-3(b)(1)(i); 
SEC Cross-Border Rule, 79 FR at 47302, 47371.
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B. Non-U.S. Persons

    Under the Proposed Rule, whether a non-U.S. person would need to 
include a swap in its de minimis threshold calculation would depend on 
the non-U.S. person's status, the status of its counterparty, and, in 
some cases, the jurisdiction in which the non-U.S. person is regulated. 
Specifically, the Proposed Rule would require a person that is a 
Guaranteed Entity or an SRS to count all of its dealing swaps towards 
the de minimis threshold.\182\ In addition, an Other Non-U.S. Person 
would be required to count dealing swaps with a U.S. person toward its 
de minimis threshold calculation, except for swaps conducted through a 
foreign branch of a registered SD.\183\ Further, subject to certain 
exceptions, the Proposed Rule would require an Other Non-U.S. Person to 
count dealing swaps toward its de minimis threshold calculation if the 
counterparty to such swaps is a Guaranteed Entity.
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    \182\ As discussed in section II.B above, for purposes of this 
release and ease of reading, a non-U.S. person whose obligations 
under the swaps are subject to a guarantee by a U.S. person is being 
referred to as a ``Guaranteed Entity.'' A non-U.S. person may be a 
Guaranteed Entity with respect to swaps with certain counterparties, 
but not be deemed a Guaranteed Entity with respect to swaps with 
other counterparties. Also, a non-U.S. person could be a Guaranteed 
Entity or an Other Non-U.S. Person, depending on the specific swap.
    \183\ This release uses the phrase ``through a foreign branch'' 
to describe swaps that are entered into by a foreign branch and 
which meet the definition of ``swap conducted through a foreign 
branch.'' As stated, the Commission is proposing that ``swap 
conducted through a foreign branch'' would mean a swap entered into 
by a foreign branch where: (1) The foreign branch or another foreign 
branch is the office through which the U.S. person makes and 
receives payments and deliveries under the swap pursuant to a master 
netting or similar trading agreement, and the documentation of the 
swap specifies that the office for the U.S. person is such foreign 
branch; (2) the swap is entered into by such foreign branch in its 
normal course of business; and (3) the swap is reflected in the 
local accounts of the foreign branch.
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1. Swaps by a Significant Risk Subsidiary
    Under the Proposed Rule, an SRS would include all of its dealing 
swaps in its de minimis threshold calculation without exception.\184\ 
As discussed in section II.C above, the proposed definition of SRS 
encompasses a person that, by virtue of being a significant subsidiary 
of a U.S. person, and not being subject to prudential supervision as a 
subsidiary of a BHC or subject to comparable capital and margin rules, 
raises the concerns intended to be addressed by the Dodd-Frank Act 
requirements addressed by the Proposed Rule, regardless of the U.S. 
person status of its counterparty.
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    \184\ Proposed Sec.  23.23(b)(1).
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    The Commission believes that treating an SRS differently from a 
U.S. person could create a substantial regulatory loophole, 
incentivizing U.S. persons to conduct their dealing business with non-
U.S. persons through significant non-U.S. subsidiaries to avoid 
application of the Dodd-Frank Act SD requirements. Allowing swaps 
entered into by SRSs, which have the potential to impact the ultimate 
U.S. parent entity and U.S. commerce, to be treated differently 
depending on how the parties structure their transactions could 
undermine the effectiveness of the Dodd-Frank Act swaps provisions and 
related Commission regulations addressed by the Proposed Rule. Applying 
the same standard to similar transactions helps to limit those 
incentives and regulatory implications.
    However, under the Proposed Rule, an Other Non-U.S. Person would 
not be required to count a dealing swap with an SRS toward its de 
minimis threshold calculation, unless the SRS was also a Guaranteed 
Entity (and no exception applied). As noted above, an SRS would be 
required to count all of its dealing swaps. However, where an Other 
Non-U.S. Person is entering into a dealing swap with an SRS, requiring 
the Other Non-U.S. Person to count the swap towards the de minimis 
threshold could cause the Other Non-U.S. Person to stop engaging in 
swap activities with the SRS. The Commission believes it is important 
to ensure that an SRS, particularly a commercial entity, continues to 
have access to swap liquidity from Other Non-U.S. Persons for hedging 
or other non-dealing purposes.
    In addition, a person's status as an SRS would be determined at the 
entity level and, thus, an SRS would include the swap dealing activity 
of operations that are part of the same legal person, including those 
of its branches. Therefore, an SRS would include in its SD de minimis 
threshold calculation dealing swaps entered into by a branch of the 
SRS.
2. Swaps With a U.S. Person
    The Proposed Rule would require a non-U.S. person to count all 
dealing swaps with a counterparty that is a U.S. person toward its de 
minimis threshold calculation, except for swaps with a counterparty 
that is a foreign branch of a registered U.S. SD and such swap meets 
the definition of being ``conducted through a foreign branch'' of such 
registered SD.\185\ Generally, the Commission believes that all 
potential SDs should include in their de minimis threshold calculations 
any swap with a U.S. person. As discussed in section II.A, the proposed 
term ``U.S. person'' encompasses persons that inherently raise the 
concerns intended to be addressed by the Dodd-Frank Act regardless of 
the U.S. person status of their counterparty. In the event of a default 
or insolvency of a non-U.S. SD, the SD's U.S. counterparties could be 
adversely affected. A credit event, including funding and liquidity 
problems, downgrades, default, or insolvency at a non-U.S. SD could 
therefore have a direct adverse impact on its U.S. counterparties, 
which could in turn create the risk of disruptions to the U.S. 
financial system.
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    \185\ Proposed Sec.  23.23(b)(2)(i).
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    The Proposed Rule's approach in allowing a non-U.S. person to 
exclude swaps conducted through a foreign branch of a registered SD 
from its de minimis threshold calculation is consistent with the 
Guidance.\186\ The Commission's view is that its regulatory interest in 
these swaps is not sufficient to warrant creating a potential 
competitive disadvantage for foreign branches of U.S. SDs with respect 
to their foreign entity competitors by requiring non-U.S. persons to 
count trades with them toward their de minimis threshold calculations. 
In this regard, the Commission notes that a swap conducted through a 
foreign branch of a registered SD would trigger certain Dodd-Frank Act 
transactional requirements, particularly margin requirements, and, 
thus, such swap activity would not be conducted outside

[[Page 972]]

the Dodd-Frank Act regime. Moreover, in addition to certain Dodd-Frank 
Act requirements that would apply to such swaps, other foreign 
regulatory requirements may also apply similar transactional 
requirements to the transactions.\187\ Accordingly, the Commission 
believes that it would be appropriate and consistent with section 2(i) 
of the CEA to allow non-U.S. persons to exclude from their de minimis 
calculation any swap dealing transactions conducted through a foreign 
branch of a registered SD. However, this exception would not apply for 
Guaranteed Entities (discussed below) or SRSs (discussed above), who 
would have to count all of their dealing swaps.
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    \186\ See Guidance, 78 FR at 45323-24.
    \187\ As noted above in section I.B, significant and substantial 
progress has been made in the world's primary swaps trading 
jurisdictions to implement the G20 swaps reform commitments.
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3. Swaps Subject to a Guarantee
    In an approach that is generally consistent with the Guidance,\188\ 
the Proposed Rule would require a non-U.S. person to include in its de 
minimis threshold calculation swap dealing transactions where its 
obligations under the swaps are subject to a guarantee by a U.S. 
person.\189\ The Commission believes that this result is appropriate 
because the swap obligations of a Guaranteed Entity are identical, in 
relevant aspects, to a swap entered into directly by a U.S. person. As 
a result of the guarantee, the U.S. guarantor bears risk arising out of 
the swap as if it had entered into the swap directly. The U.S. 
guarantor's financial resources in turn enable the Guaranteed Entity to 
engage in dealing activity, because the Guaranteed Entity's 
counterparties will look to both the Guaranteed Entity and its U.S. 
guarantor to ensure performance of the swap. Absent the guarantee from 
the U.S. person, a counterparty may choose not to enter into the swap 
or may not do so on the same terms. In this way, the Guaranteed Entity 
and the U.S. guarantor effectively act together to engage in the 
dealing activity.\190\
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    \188\ The Guidance stated that where a non-U.S. affiliate of a 
U.S. person has its swap dealing obligations with non-U.S. persons 
guaranteed by a U.S. person, the guaranteed affiliate generally 
would be required to count those swap dealing transactions with non-
U.S. persons (in addition to its swap dealing transactions with U.S. 
persons) for purposes of determining whether the affiliate exceeds a 
de minimis amount of swap dealing activity and must register as an 
SD. Guidance, 78 FR at 45312-13. As discussed above, the Proposed 
Rule would not require that the guarantor be an affiliate of the 
guaranteed person for that person to be a Guaranteed Entity.
    \189\ Proposed Sec.  23.23(b)(2)(ii).
    \190\ The Commission notes that this view is consistent with the 
SEC's approach in its cross-border rule. See SEC Cross-Border Rule, 
79 FR at 47289.
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    Further, the Commission believes that treating a Guaranteed Entity 
differently from a U.S. person could create a substantial regulatory 
loophole, incentivizing U.S. persons to conduct their dealing business 
with non-U.S. persons through non-U.S. affiliates, with a U.S. 
guarantee, to avoid application of the Dodd-Frank Act SD requirements. 
Allowing transactions that have a similar economic reality with respect 
to U.S. commerce to be treated differently depending on how the parties 
structure their transactions could undermine the effectiveness of the 
Dodd-Frank Act swap provisions and related Commission regulations 
addressed by the Proposed Rule. Applying the same standard to similar 
transactions helps to limit those incentives and regulatory 
implications.
    The Commission is also proposing that a non-U.S. person must count 
dealing swaps with a Guaranteed Entity in its SD de minimis threshold 
calculation, except when: (1) The Guaranteed Entity is registered as an 
SD; or (2) the Guaranteed Entity's swaps are subject to a guarantee by 
a U.S. person that is a non-financial entity.\191\ The guarantee of a 
swap is an integral part of the swap and, as discussed above, 
counterparties may not be willing to enter into a swap with a 
Guaranteed Entity in the absence of the guarantee. The Commission 
recognizes that, given the highly integrated corporate structures of 
global financial enterprises described above, financial groups may 
elect to conduct their swap dealing activity in a number of different 
ways, including through a U.S. person or through a non-U.S. affiliate 
that benefits from a guarantee from a U.S. person. Therefore, in order 
to avoid creating a regulatory loophole, the Commission believes that 
swaps of a non-U.S. person with a Guaranteed Entity should receive the 
same treatment as swaps with a U.S. person. The two exceptions 
discussed above are intended to address those situations where the risk 
of the swap between the non-U.S. person and the Guaranteed Entity would 
be otherwise managed under the Dodd-Frank Act swap regime or is 
primarily outside the U.S. financial sector.\192\
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    \191\ Proposed Sec.  23.23(b)(2)(iii).
    \192\ In this regard, the Commission notes that the SEC's cross-
border rules do not require a non-U.S. person that is not a conduit 
affiliate or guaranteed by a U.S. person to count dealing swaps with 
a guaranteed entity toward its de minimis threshold in any case. 
Below we solicit comment on whether the CFTC should adopt a similar 
approach. See SEC Cross-Border Rule, 79 FR at 47322.
---------------------------------------------------------------------------

    Where a non-U.S. person (that itself is not a Guaranteed Entity or 
an SRS) enters into swap dealing transactions with a Guaranteed Entity 
that is a registered SD, the Commission preliminarily believes it is 
appropriate to permit the non-U.S. person not to count its dealing 
transactions with the Guaranteed Entity against the non-U.S. person's 
de minimis threshold for two principal reasons. First, requiring the 
non-U.S. person to count such swaps may incentivize them to not engage 
in dealing activity with Guaranteed Entities, thereby contributing to 
market fragmentation and competitive disadvantages for entities wishing 
to access foreign markets. Second, one counterparty to the swap is a 
registered SD, and therefore is subject to comprehensive swap 
regulation under the oversight of the Commission.
    In addition, a non-U.S. person that is not a Guaranteed Entity or 
an SRS would not include in its de minimis threshold calculation its 
swap dealing transactions with a Guaranteed Entity where the Guaranteed 
Entity is guaranteed by a non-financial entity. In these circumstances, 
systemic risk to U.S. financial markets is mitigated because the U.S. 
guarantor is a non-financial entity whose primary business activities 
are not related to financial products and such activities primarily 
occur outside the U.S. financial sector.\193\ For purposes of the 
Proposed Rule, the Commission interprets ``non-financial entity'' to 
mean a counterparty that is not an SD, an MSP, or a financial end-user 
(as defined in the SD and MSP margin rule in Sec.  23.151).
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    \193\ Moreover, the SRS definition would include those non-
financial U.S. parent entities that meet the risk-based thresholds 
set out above in section II.C.
---------------------------------------------------------------------------

C. Aggregation Requirement

    Paragraph (4) of the SD definition in Sec.  1.3 requires that, in 
determining whether its swap dealing transactions exceed the de minimis 
threshold, a person must include the aggregate notional value of any 
swap dealing transactions entered into by its affiliates under common 
control.\194\ Consistent with CEA section 2(i), the Commission 
interprets this aggregation requirement in a manner that applies the 
same aggregation principles to all affiliates in a corporate group, 
whether they are U.S. or non-U.S. persons. Accordingly, under the 
Proposed Rule and consistent with the Guidance,\195\ a potential SD, 
whether a U.S. or non-U.S. person, would aggregate all swaps connected 
with its dealing activity with those of persons controlling, controlled 
by, or

[[Page 973]]

under common control with \196\ the potential SD to the extent that 
these affiliated persons are themselves required to include those swaps 
in their own de minimis threshold calculations, unless the affiliated 
person is itself a registered SD. The Commission notes that its 
proposed approach would ensure that the aggregate notional value of 
applicable swap dealing transactions of all such unregistered U.S. and 
non-U.S. affiliates does not exceed the de minimis level.
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    \194\ 17 CFR 1.3, Swap dealer, paragraph (4).
    \195\ See Guidance, 78 FR at 45323.
    \196\ The Commission clarifies that for this purpose, the term 
``affiliates under common control'' would include parent companies 
and subsidiaries.
---------------------------------------------------------------------------

    Stated in general terms, the Commission's approach allows both U.S. 
persons and non-U.S. persons in an affiliated group to engage in swap 
dealing activity up to the de minimis threshold. When the affiliated 
group meets the de minimis threshold in the aggregate, one or more 
affiliate(s) (a U.S. affiliate or a non-U.S. affiliate) would have to 
register as an SD so that the relevant swap dealing activity of the 
unregistered affiliates remains below the threshold. The Commission 
recognizes the borderless nature of swap dealing activities, in which a 
dealer may conduct swap dealing business through its various affiliates 
in different jurisdictions, and believes that its approach would 
address the concern that an affiliated group of U.S. and non-U.S. 
persons engaged in swap dealing transactions with a significant 
connection to the United States may not be required to register solely 
because such swap dealing activities are divided among affiliates that 
all individually fall below the de minimis threshold.

D. Certain Exchange-Traded and Cleared Swaps

    The Proposed Rule, in an approach that is generally consistent with 
the Guidance, would allow a non-U.S. person that is not a Guaranteed 
Entity or SRS to exclude from its de minimis threshold calculation any 
swap that it anonymously enters into on a designated contract market 
(``DCM''), a swap execution facility (``SEF'') that is registered with 
the Commission or exempted by the Commission from SEF registration 
pursuant to section 5h(g) of the CEA, or a foreign board of trade 
(``FBOT'') that is registered with the Commission pursuant to part 48 
of its regulations,\197\ if such swap is also cleared through a 
registered or exempt derivatives clearing organization (``DCO'').\198\
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    \197\ The Commission would consider the proposed exception 
described herein also to apply with respect to an FBOT that provides 
direct access to its order entry and trade matching system from 
within the U.S. pursuant to no-action relief issued by Commission 
staff.
    \198\ Proposed Sec.  23.23(d).
---------------------------------------------------------------------------

    When a non-U.S. person enters into a swap that is executed 
anonymously on a registered or exempt SEF, DCM, or registered FBOT, the 
Commission recognizes that the non-U.S. person would not have the 
necessary information about its counterparty to determine whether the 
swap should be included in its de minimis threshold calculation. The 
Commission therefore believes that in this case the practical 
difficulties make it reasonable for the swap to be excluded 
altogether.\199\
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    \199\ Additionally, as the Commission has clarified in the past, 
when a non-U.S. person clears a swap through a registered or exempt 
DCO, such non-U.S. person would not have to include the resulting 
swap (i.e., the novated swap) in its de minimis threshold 
calculation. See, e.g., 2016 Proposal, 81 FR at 71957 n.88. A swap 
that is submitted for clearing is extinguished upon novation and 
replaced by new swap(s) that result from novation. See 17 CFR 
39.12(b)(6). See also Derivatives Clearing Organization General 
Provisions and Core Principles, 76 FR 69334, 69361 (Nov. 8, 2011). 
Where a swap is created by virtue of novation, such swap does not 
implicate swap dealing, and therefore it would not be appropriate to 
include such swaps in determining whether a non-U.S. person should 
register as an SD.
---------------------------------------------------------------------------

    The Proposed Rule is consistent with the Guidance but would expand 
the exception to include SEFs and DCOs that are exempt from 
registration under the CEA, and also states that SRSs do not qualify 
for this exception. The CEA provides that the Commission may grant an 
exemption from registration if it finds that a foreign SEF or DCO is 
subject to comparable, comprehensive supervision and regulation by the 
appropriate governmental authorities in the SEF's or DCO's home 
country.\200\ The Commission believes that the policy rationale for 
providing relief to swaps anonymously executed on a SEF, DCM, or FBOT 
and then cleared also extends to swaps executed on a foreign SEF and/or 
cleared through a foreign DCO that has been granted an exemption from 
registration. As noted, the foreign SEF or DCO would be subject to 
comparable and comprehensive regulation, as is the case with U.S.-based 
SEFs and DCMs.\201\
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    \200\ See CEA sections 5h for the SEF exemption provision and 
5b(h) for the DCO exemption provision.
    \201\ The Commission recognizes that it recently issued two 
proposed rulemakings regarding non-U.S. DCOs. One applied to DCOs 
registered with the Commission. Registration With Alternative 
Compliance for Non-U.S. Derivatives Clearing Organizations, 84 FR 
34819 (proposed July 19, 2019). That proposal, and a second that 
applied to exempt DCOs, Exemption From Derivatives Clearing 
Organization Registration, 84 FR 35456 (proposed July 23, 2019), 
both applied to non-U.S. DCOs that do not pose substantial risk to 
the U.S. financial system based on metrics set forth therein. The 
Commission may modify this exception for exchange-traded and cleared 
swaps as necessary, based on any DCO-related proposed rules that are 
adopted by the Commission.
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E. Request for Comment

    The Commission invites comment on all aspects of the cross-border 
application of the SD registration threshold described in sections 
III.A through III.D, and specifically requests comments on the 
following questions. Please explain your responses and provide 
alternatives to the relevant portions of the Proposed Rule, where 
applicable.
    (19) Should a non-U.S. person be permitted to exclude from its de 
minimis threshold calculation swap dealing transactions conducted 
through a foreign branch of a registered SD?
    (20) As discussed in section II.F, under the Proposed Rule, the 
term ``U.S. branch'' would mean a branch or agency of a non-U.S. 
banking organization where such branch or agency: (1) Is located in the 
United States; (2) maintains accounts independently of the home office 
and other U.S. branches, with the profit or loss accrued at each branch 
determined as a separate item for each U.S. branch; and (3) engages in 
the business of banking and is subject to substantive banking 
regulation in the state or district where located. Given that 
definition, would it be appropriate to require a U.S. branch to include 
in its SD de minimis threshold calculation all of its swap dealing 
transactions, as if they were swaps entered into by a U.S. person? 
Would it be appropriate to require an Other Non-U.S. Person to include 
in its SD de minimis threshold calculation dealing swaps conducted 
through a U.S. branch?
    (21) Under the Proposed Rule, an Other Non-U.S. Person would not be 
required to include its dealing swaps with an SRS or an Other Non-U.S. 
Person in its SD de minimis threshold. The Commission invites comment 
as to whether, and in what circumstances, a non-U.S. person should be 
required to include dealing swaps with a non-U.S. person in its SD de 
minimis threshold calculation if any of the risk of such swaps is 
transferred to an affiliated U.S. SD through one or more inter-
affiliate swaps, and as to whether it would be too complex or costly to 
monitor and implement such a rule.\202\
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    \202\ The Commission notes that the Commission's final margin 
rule requires covered swap entities to collect initial margin from 
certain affiliates that are not subject to comparable initial margin 
collection requirements on their own outward-facing swaps with 
financial end-users, which addresses some of the credit risks 
associated with the outward-facing swaps. See 17 CFR 23.159; Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 81 FR 636, 673-74 (Jan. 6, 2016).

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[[Page 974]]

    (22) With respect to proposed Sec.  23.23(b)(2)(iii), should the 
Commission follow the SEC's approach, which does not require a non-U.S. 
person that is not a conduit affiliate nor guaranteed by a U.S. person 
to count dealing swaps with a non-U.S. person whose security-based swap 
transactions are guaranteed by a U.S. person. The SEC noted that 
``concerns regarding the risk posed to the United States by such 
security-based swaps, and regarding the potential use of such 
guaranteed affiliates to evade the Dodd-Frank Act . . . are addressed 
by the requirement that guaranteed affiliates count their own dealing 
activity against the de minimis thresholds when the counterparty has 
recourse to a U.S. person.'' \203\
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    \203\ SEC Cross-Border Rule, 79 FR at 47322.
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IV. Cross-Border Application of the Major Swap Participant Registration 
Tests

    CEA section 1a(33) defines the term ``major swap participant'' to 
include persons that are not SDs but that nevertheless pose a high 
degree of risk to the U.S. financial system by virtue of the 
``substantial'' nature of their swap positions.\204\ In accordance with 
the Dodd-Frank Act and CEA section 1a(33)(B), the Commission adopted 
rules further defining ``major swap participant'' and providing that a 
person would not be deemed an MSP unless its swap positions exceed one 
of several thresholds.\205\ The thresholds were designed to take into 
account default-related credit risk, the risk of multiple market 
participants failing close in time, and the risk posed by a market 
participant's swap positions on an aggregate level.\206\ The Commission 
also adopted interpretive guidance stating that, for purposes of the 
MSP analysis, an entity's swap positions would be attributable to a 
parent, other affiliate, or guarantor to the extent that the 
counterparty has recourse to the parent, other affiliate, or guarantor 
and the parent or guarantor is not subject to capital regulation by the 
Commission, SEC, or a prudential regulator (``attribution 
requirement'').\207\
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    \204\ See 7 U.S.C. 1a(33)(A) (defining ``major swap 
participant'' to mean any person that is not an SD and either (1) 
maintains a substantial position in swaps for any of the major swap 
categories, subject to certain exclusions; (2) whose outstanding 
swaps create substantial counterparty exposure that could have 
serious effects on the U.S. financial system; or (3) is a highly 
leveraged financial entity that is not subject to prudential capital 
requirements and that maintains a substantial position in swaps for 
any of the major swap categories. See also 17 CFR 1.3, Major swap 
participant, paragraph (1); 156 Cong. Rec. S5907 (daily ed. July 15, 
2010) (colloquy between Senators Hagen and Lincoln, discussing how 
the goal of the major participant definitions was to ``focus on risk 
factors that contributed to the recent financial crisis, such as 
excessive leverage, under-collateralization of swap positions, and a 
lack of information about the aggregate size of positions'').
    \205\ See 17 CFR 1.3, Major swap participant, Substantial 
counterparty exposure, Substantial position, Financial entity; 
highly leveraged, Hedging or mitigating commercial risk, and 
Category of swaps; major swap category. See also Entities Rule, 77 
FR 30596.
    \206\ See Entities Rule, 77 FR at 30666 (discussing the guiding 
principles behind the Commission's definition of ``substantial 
position'' in 17 CFR 1.3); id. at 30683 (noting that the 
Commission's definition of ``substantial counterparty exposure'' in 
17 CFR 1.3 is founded on similar principles as its definition of 
``substantial position'').
    \207\ Id. at 30689.
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    The Commission is now proposing rules to address the cross-border 
application of the MSP thresholds to the swap positions of U.S. and 
non-U.S. persons.\208\ Applying CEA section 2(i) and principles of 
international comity, the Proposed Rule identifies when a potential 
MSP's cross-border swap positions would apply toward the MSP thresholds 
and when they may be properly excluded. As discussed below, whether a 
potential registrant would include a particular swap in its MSP 
calculation would depend on whether the potential registrant is a U.S. 
person, a Guaranteed Entity, an SRS, or an Other Non-U.S. Person.\209\ 
The Proposed Rule's approach for the cross-border application of the 
MSP thresholds is similar to the approach described above for the SD 
threshold.
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    \208\ Proposed Sec.  23.23(c).
    \209\ As indicated above, for purposes of the Proposed Rule, an 
``Other Non-U.S. Person'' refers to a non-U.S. person that is 
neither a Guaranteed Entity nor an SRS.
---------------------------------------------------------------------------

A. U.S. Persons

    Under the Proposed Rule, all of a U.S. person's swap positions 
would apply toward the MSP registration thresholds without 
exception.\210\ As discussed in the context of the Proposed Rule's 
approach to applying the SD de minimis registration threshold, by 
virtue of it being domiciled or organized in the United States, or the 
inherent nature of its connection to the United States, all of a U.S. 
person's activities have a significant nexus to U.S. markets, giving 
the Commission a particularly strong regulatory interest in its swap 
activities.\211\ Accordingly, the Commission believes that all of a 
U.S. person's swap positions, regardless of where they occur or the 
U.S. person status of the counterparty, should apply toward the MSP 
thresholds.
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    \210\ Proposed Sec.  23.23(c)(1).
    \211\ See supra section III.A.
---------------------------------------------------------------------------

B. Non-U.S. Persons

    Under the Proposed Rule, whether a non-U.S. person would include a 
swap position in its MSP threshold calculation would depend on its 
status, the status of its counterparty, or the characteristics of the 
swap. Specifically, the Proposed Rule would require a person that is a 
Guaranteed Entity or an SRS to count all of its swap positions. In 
addition, an Other Non-U.S. Person would be required to count all swap 
positions with a U.S. person, except for swaps conducted through a 
foreign branch of a registered SD. Subject to certain exceptions, the 
Proposed Rule would also require an Other Non-U.S. Person to count all 
swap positions if the counterparty to such swaps is a Guaranteed 
Entity.\212\
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    \212\ As discussed in sections II.B and III.B above, for 
purposes of this release and ease of reading, such a non-U.S. person 
whose obligations under the swaps are subject to a guarantee by a 
U.S. person is being referred to as a ``Guaranteed Entity.'' 
Depending on the characteristics of the swap, a non-U.S. person may 
be a Guaranteed Entity with respect to swaps with certain 
counterparties, but not be deemed a Guaranteed Entity with respect 
to swaps with other counterparties.
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1. Swaps by a Significant Risk Subsidiary
    Under the Proposed Rule, an SRS would include all of its swap 
positions in its MSP threshold calculation.\213\ As discussed in 
section II.C above, the proposed term SRS encompasses a person that, by 
virtue of being a significant subsidiary of a U.S. person, and not 
being subject to prudential supervision as a subsidiary of a BHC or 
subject to comparable capital and margin rules, raises the concerns 
intended to be addressed by the Dodd-Frank Act requirements addressed 
by the Proposed Rule, regardless of the U.S. person status of its 
counterparty.
---------------------------------------------------------------------------

    \213\ Proposed Sec.  23.23(c)(1).
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    The Commission believes that treating an SRS differently from a 
U.S. person could create a substantial regulatory loophole by 
incentivizing U.S. persons to conduct their swap business with non-U.S. 
persons through significant non-U.S. subsidiaries to avoid application 
of the Dodd-Frank Act MSP requirements. Allowing swaps entered into by 
SRSs, which have the potential to impact the ultimate U.S. parent 
entity and U.S. commerce, to be treated differently depending on how 
the parties structure their transactions could undermine the 
effectiveness of the Dodd-Frank Act swap provisions and related 
Commission regulations addressed by the Proposed Rule. Applying the 
same standard to similar

[[Page 975]]

swap positions helps to limit those incentives and regulatory 
implications.
    In addition, a person's status as an SRS would be determined at the 
entity level and, thus, an SRS would include the swap positions that 
are part of the same legal person, including those of its branches. 
Therefore, an SRS would include in its MSP threshold calculation swap 
positions entered into by a branch of the SRS.
2. Swap Positions With a U.S. Person
    Under the Proposed Rule, a non-U.S. person would include all of its 
swap positions with U.S. persons, unless the transaction is a swap 
conducted through a foreign branch of a registered SD.\214\ Generally, 
the Commission believes that a potential MSP should include in its MSP 
threshold calculation any swap position with a U.S. person. As 
discussed above, the term ``U.S. person'' encompasses persons that 
inherently raise the concerns intended to be addressed by the Dodd-
Frank Act, regardless of the U.S. person status of their counterparty. 
The default or insolvency of the non-U.S. person would have a direct 
adverse effect on a U.S. person and, by virtue of the U.S. person's 
significant nexus to the U.S. financial system, potentially could 
result in adverse effects or disruption to the U.S. financial system as 
a whole, particularly if the non-U.S. person's swap positions are 
substantial enough to exceed an MSP registration threshold.
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    \214\ Proposed Sec.  23.23(c)(2)(i).
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    The Proposed Rule's approach in allowing a non-U.S. person to 
exclude swap positions conducted through a foreign branch of a 
registered SD is consistent with the approach described in section 
III.B.2 for cross-border treatment with respect to SDs. A swap 
conducted through a foreign branch of a registered SD would trigger the 
Dodd-Frank Act transactional requirements (or comparable requirements) 
and therefore mitigate concern that this exclusion could be used to 
engage in swap activities outside the Dodd-Frank Act regime.\215\ 
Accordingly, the Commission believes that it would be appropriate and 
consistent with section 2(i) to allow a non-U.S. person, that is not a 
Guaranteed Entity or SRS, to exclude from its MSP threshold calculation 
any swaps conducted through a foreign branch of a registered SD. The 
Commission recognizes that the Guidance provides that such swaps would 
need to be cleared or that the documentation of the swaps would have to 
require the foreign branch to collect daily variation margin, with no 
threshold, on its swaps with such non-U.S. person.\216\ The Proposed 
Rule does not include such a requirement given that the foreign branch 
of the registered SD would nevertheless be required to post and collect 
margin, as required by the SD margin rules. In addition, a non-U.S. 
person's swaps conducted through a foreign branch of a registered SD 
must be addressed in the SD's risk management program. Such program 
must account for, among other things, overall credit exposures to non-
U.S. persons.\217\
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    \215\ The Commission believes that the Dodd-Frank Act-related 
requirements that the transaction would be subject to as a result of 
a registered SD being a counterparty would also mitigate concerns 
that the non-U.S. person would not be subject to CFTC capital rules 
(when implemented).
    \216\ See Guidance, 78 FR at 45324-25.
    \217\ See 17 CFR 23.600(c)(4)(ii), requiring registered SDs and 
MSPs to have credit risk policies and procedures that account for 
daily measurement of overall credit exposure to comply with 
counterparty credit limits, and monitoring and reporting of 
violations of counterparty credit limits performed by personnel that 
are independent of the business trading unit. See also 17 CFR 
23.600(c)(1)(i), requiring the senior management and the governing 
body of each SD and MSP to review and approve credit risk tolerance 
limits for the SD or MSP.
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3. Swap Positions Subject to a Guarantee
    The Proposed Rule would require a non-U.S. person to include in its 
MSP calculation each swap position with respect to which it is a 
Guaranteed Entity.\218\ As explained in the context of the SD de 
minimis threshold calculation,\219\ the Commission believes that the 
swap positions of a non-U.S. person whose swap obligations are 
guaranteed by a U.S. person are identical, in relevant aspects, to 
those entered into directly by a U.S. person and thus present similar 
risks to the stability of the U.S. financial system or of U.S. 
entities. Although the default on that swap may not directly affect the 
U.S. guarantor on that swap, the default could affect the Guaranteed 
Entity's ability to meet its other obligations, for which the U.S. 
guarantor may also be liable. Treating Guaranteed Entities differently 
from U.S. persons could also create a substantial regulatory loophole, 
allowing transactions that have a similar connection to or impact on 
U.S. commerce to be treated differently depending on how the parties 
are structured and thereby undermining the effectiveness of the Dodd-
Frank Act swap provisions and related Commission regulations.
---------------------------------------------------------------------------

    \218\ Proposed Sec.  23.23(c)(2)(ii).
    \219\ See supra section III.B.3.
---------------------------------------------------------------------------

    The Commission is also proposing that a non-U.S. person must count 
swap positions with a Guaranteed Entity counterparty, except when the 
counterparty is registered as an SD.\220\ The Commission notes that the 
guarantee of a swap is an integral part of the swap and that, as 
discussed above, counterparties may not be willing to enter into a swap 
with a Guaranteed Entity in the absence of the guarantee. The 
Commission also recognizes that, given the highly integrated corporate 
structures of global financial enterprises, financial groups may elect 
to conduct their swap activity in a number of different ways, including 
through a U.S. person or through a non-U.S. affiliate that benefits 
from a guarantee from a U.S. person. Therefore, in order to avoid 
creating a substantial regulatory loophole, the Commission believes 
that swaps of a non-U.S. person with a counterparty whose obligations 
under the swaps are guaranteed by a U.S. person should receive the same 
treatment as swaps with a U.S. person.
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    \220\ Proposed Sec.  23.23(c)(2)(iii). The Commission notes that 
the proposed MSP provision does not include a provision for swap 
positions with non-U.S. persons guaranteed by a non-financial 
entity, similar to the carve-out in the proposed SD provision. See 
proposed Sec.  23.23(b)(2)(iii)(2).
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    However, similar to the discussion regarding SDs in section 
III.B.3, where a non-U.S. person (that itself is not a Guaranteed 
Entity or an SRS) enters into a swap with a Guaranteed Entity that is a 
registered SD, it is appropriate to permit the non-U.S. person not to 
count its swap position with the Guaranteed Entity against the non-U.S. 
person's MSP thresholds,\221\ because one counterparty to the swap is a 
registered SD subject to comprehensive swap regulation and operating 
under the oversight of the Commission. For example, the swap position 
must be addressed in the SD's risk management program and account for, 
among other things, overall credit exposures to non-U.S. persons.\222\ 
In addition, a non-U.S. person's swaps with a Guaranteed Entity that is 
an SD would be included in exposure calculations and attributed to the 
U.S. guarantor for purposes of determining whether the U.S. guarantor's 
swap exposures are systemically important on a portfolio basis and 
therefore require the protections provided by MSP registration. 
Therefore, in these

[[Page 976]]

circumstances, the Commission believes it is not necessary for the non-
U.S. person to count such a swap position toward its MSP thresholds.
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    \221\ Proposed Sec.  23.23(c)(2)(iii).
    \222\ See 17 CFR 23.600(c)(4)(ii), requiring SDs and MSPs to 
have credit risk policies and procedures that account for daily 
measurement of overall credit exposure to comply with counterparty 
credit limits, and monitoring and reporting of violations of 
counterparty credit limits performed by personnel that are 
independent of the business trading unit. See also 17 CFR 
23.600(c)(1)(i), requiring the senior management and the governing 
body of each SD and MSP to review and approve credit risk tolerance 
limits for the SD or MSP.
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C. Attribution Requirement

    In the Entities Rule, the Commission and the SEC provided a joint 
interpretation that an entity's swap positions in general would be 
attributed to a parent, other affiliate, or guarantor for purposes of 
the MSP analysis to the extent that the counterparties to those 
positions have recourse to the parent, other affiliate, or guarantor in 
connection with the position, such that no attribution would be 
required in the absence of recourse.\223\ Even in the presence of 
recourse, however, the Commissions stated that attribution of a 
person's swap positions to a parent, other affiliate, or guarantor 
would not be necessary if the person is already subject to capital 
regulation by the Commission or the SEC or is a U.S. entity regulated 
as a bank in the United States (and is therefore subject to capital 
regulation by a prudential regulator).\224\
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    \223\ See Entities Rule, 77 FR at 30689 (Stating that ``an 
entity's swap . . . positions in general would be attributed to a 
parent, other affiliate or guarantor for purposes of the major 
participant analysis to the extent that the counterparties to those 
positions would have recourse to that other entity in connection 
with the position.'' The Commission stated further that ``entities 
will be regulated as major participants when they pose a high level 
of risk in connection with the swap . . . positions they 
guarantee.'').
    \224\ Id.
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    The Commission is proposing to address the cross-border application 
of the attribution requirement in a manner consistent with the Entities 
Rule and CEA section 2(i) and generally comparable to the approach 
adopted by the SEC.\225\ Specifically, the Commission believes that the 
swap positions of an entity, whether a U.S. or non-U.S. person, should 
not be attributed to a parent, other affiliate, or guarantor for 
purposes of the MSP analysis in the absence of a guarantee. Even in the 
presence of a guarantee, attribution would not be required if the 
entity that entered into the swap directly is subject to capital 
regulation by the Commission or the SEC or is regulated as a bank in 
the United States.\226\
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    \225\ See SEC Cross-Border Rule, 79 FR at 47346-48.
    \226\ The Commission further clarifies that the swap positions 
of an entity that is required to register as an MSP, or whose MSP 
registration is pending, would not be subject to the attribution 
requirement.
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    If a guarantee is present, however, and the entity being guaranteed 
is not subject to capital regulation (as described above), whether the 
attribution requirement would apply would depend on the U.S. person 
status of the person to whom there is recourse under the guarantee 
(i.e., the U.S. person status of the guarantor). Specifically, a U.S. 
person guarantor would attribute to itself any swap position of an 
entity subject to a guarantee, whether a U.S. person or a non-U.S. 
person, for which the counterparty to the swap has recourse against 
that U.S. person guarantor. The Commission believes that when a U.S. 
person acts as a guarantor of a swap position, the guarantee creates 
risk within the United States of the type that MSP regulation is 
intended to address, regardless of the U.S. person status of the entity 
subject to a guarantee or its counterparty.\227\
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    \227\ See Entities Rule, 77 FR at 30689 (attribution is intended 
to reflect the risk posed to the U.S. financial system when a 
counterparty to a position has recourse against a U.S. person).
---------------------------------------------------------------------------

    A non-U.S. person would attribute to itself any swap position of an 
entity for which the counterparty to the swap has recourse against the 
non-U.S. person unless all relevant persons (i.e., the non-U.S. person 
guarantor, the entity whose swap positions are guaranteed, and its 
counterparty) are non-U.S. persons that are not Guaranteed Entities. In 
this regard, the Commission believes that when a non-U.S. person 
provides a guarantee with respect to the swap position of a particular 
entity, the economic reality of the swap position is substantially 
identical, in relevant respects, to a position entered into directly by 
the non-U.S. person.
    In addition, the Commission believes that entities subject to a 
guarantee would be able to enter into significantly more swap positions 
(and take on significantly more risk) as a result of the guarantee than 
they would otherwise, amplifying the risk of the non-U.S. person 
guarantor's inability to carry out its obligations under the guarantee. 
Given the types of risk that MSP regulation is intended to address, the 
Commission has a strong regulatory interest in ensuring that the 
attribution requirement applies to non-U.S. persons that provide 
guarantees to U.S. persons and Guaranteed Entities. Accordingly, the 
Commission preliminarily believes that a non-U.S. person should be 
required to attribute to itself the swap positions of any entity for 
which it provides a guarantee unless it, the entity subject to the 
guarantee, and its counterparty are all non-U.S. persons that are not 
Guaranteed Entities.

D. Certain Exchange-Traded and Cleared Swaps

    The Proposed Rule, consistent with its approach for SDs discussed 
above in section III.D, would allow a non-U.S. person that is not a 
Guaranteed Entity or an SRS to exclude from its MSP calculation any 
swap position that it anonymously enters into on a DCM, a registered 
SEF or a SEF exempted from registration by the Commission pursuant to 
section 5h(g) of the CEA, or an FBOT registered with the Commission 
pursuant to part 48 of its regulations,\228\ if such swap is also 
cleared through a registered or exempt DCO.\229\
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    \228\ The Commission would consider the proposed exception 
described herein also to apply with respect to an FBOT that provides 
direct access to its order entry and trade matching system from 
within the U.S. pursuant to no-action relief issued by Commission 
staff.
    \229\ Proposed Sec.  23.23(d).
---------------------------------------------------------------------------

    When a non-U.S. person enters into a swap position that is executed 
anonymously on a registered or exempt SEF, DCM, or registered FBOT, the 
Commission recognizes that the non-U.S. person would not have the 
necessary information about its counterparty to determine whether the 
swap position should be included in its MSP calculation. The Commission 
therefore believes that in this case the practical difficulties make it 
reasonable for the swap position to be excluded altogether.
    The Proposed Rule is consistent with the Guidance, but would expand 
the exception to include SEFs and DCOs that are exempt from 
registration under the CEA, and also states that SRSs may not qualify 
for this exception. The CEA provides that the Commission may grant an 
exemption from registration if it finds that a foreign SEF or DCO is 
subject to comparable, comprehensive supervision and regulation by the 
appropriate governmental authorities in the SEF or DCO's home 
country.\230\
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    \230\ See CEA sections 5h for the SEF exemption provision and 
5b(h) for the DCO exemption provision. As discussed, supra note 201, 
the Commission recognizes that it recently issued proposed 
rulemakings regarding non-U.S. DCOs, and may modify this exception 
for exchange-traded and cleared swaps as necessary, based on any 
DCO-related proposed rules that are adopted by the Commission.
---------------------------------------------------------------------------

E. Request for Comment

    The Commission invites comment on all aspects of the proposed 
cross-border application of the MSP registration threshold calculation 
described in sections IV.A through IV.D, and specifically requests 
comments on the following questions. Please explain your responses and 
provide alternatives to

[[Page 977]]

the relevant portions of the Proposed Rule, where applicable.
    (23) Should the Commission modify its interpretation with regard to 
the attribution requirement to provide that attribution of a person's 
swap positions to a parent, other affiliate, or guarantor would not be 
required if the person is subject to capital standards that are 
comparable to and as comprehensive as the capital regulations and 
oversight by the Commission, SEC, or a U.S. prudential regulator? If 
so, should the home country capital standards be deemed comparable and 
comprehensive if they are consistent in all respects with Basel III?
    (24) Would it be appropriate to require a U.S. branch to include in 
its MSP threshold calculation all of its swap positions, as if they 
were swap positions of a U.S. person? Would it be appropriate to 
require an Other Non-U.S. Person to include in its MSP de minimis 
threshold calculation swaps conducted through a U.S. branch?

V. ANE Transactions

A. Background and Proposed Approach

    The ANE Staff Advisory provided that a non-U.S. SD would generally 
be required to comply with transaction-level requirements for SDs for 
ANE Transactions.\231\ In the January 2014 ANE Request for Comment, the 
Commission requested comments on all aspects of the ANE Staff Advisory, 
including: (1) The scope and meaning of the phrase ``regularly 
arranging, negotiating, or executing'' and what characteristics or 
factors distinguish ``core, front-office'' activity from other 
activities; and (2) whether the Commission should adopt the ANE Staff 
Advisory as Commission policy, in whole or in part.\232\
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    \231\ See ANE Staff Advisory. The ANE Staff Advisory represented 
the views of DSIO only, and not necessarily those of the Commission 
or any other office or division thereof. See also Guidance, 78 FR at 
45333 (providing that the transaction-level requirements include: 
(1) Required clearing and swap processing; (2) margining (and 
segregation) for uncleared swaps; (3) mandatory trade execution; (4) 
swap trading relationship documentation; (5) portfolio 
reconciliation and compression; (6) real-time public reporting; (7) 
trade confirmation; (8) daily trading records; and (9) external 
business conduct standards).
    \232\ See ANE Request for Comment, 79 FR at 1348-49.
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    The Commission received seventeen comment letters in response to 
the ANE Request for Comment.\233\ Most commenters emphasized that the 
risk associated with ANE Transactions lies outside the United States 
\234\ and that non-U.S. SDs involve U.S. personnel primarily for the 
convenience of their global customers.\235\ They also characterized the 
ANE Staff Advisory as impractical or unworkable, describing its key 
language (``regularly arranging, negotiating, or executing swaps'' and 
``performing core, front-office activities'') as vague, open to broad 
interpretation, and potentially capturing activities that are merely 
incidental to the swap transaction.\236\ They further argued that if 
the ANE Staff Advisory were adopted as Commission policy, non-U.S. SDs 
would close U.S. branches and relocate personnel to other countries (or 
otherwise terminate agency contracts with U.S.-based agents) in order 
to avoid Dodd-Frank Act swap regulation or having to interpret and 
apply the ANE Staff Advisory, thereby increasing market 
fragmentation.\237\ Two commenters addressed concerns regarding 
international comity and inconsistent, conflicting, or duplicative 
regimes, with one arguing that ``it is of paramount importance to 
prevent the duplication of applicable rules to derivative transactions, 
in particular when the transactions have a strong local nature or only 
remote links with other jurisdictions, in order to support an efficient 
derivatives market[;]'' \238\ and the other saying that ``[r]ules 
should therefore include the possibility to defer to those of the host 
regulator in most cases.'' \239\
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    \233\ Comments were submitted by the following entities: 
American Bankers Association Securities Association (``ABASA'') 
(Mar. 10, 2014); Americans for Financial Reform (``AFR'') (Mar. 10, 
2014); Barclays Bank PLC (``Barclays'') (Mar. 10, 2014); Chris R. 
Barnard (Mar. 8, 2014); Better Markets Inc. (``Better Markets'') 
(Mar. 10, 2014); Coalition for Derivatives End-Users (``Coalition'') 
(Mar. 10, 2014); Commercial Energy Working Group (Mar. 10, 2014); 
European Commission (Mar. 10, 2014); European Securities and Markets 
Authority (``ESMA'') (Mar. 13, 2014); Institute for Agriculture and 
Trade Policy (``IATP'') (Mar. 10, 2014); Institute of International 
Bankers (``IIB'') (Mar. 10, 2014); International Swaps and 
Derivatives Association, Inc. (``ISDA'') (Mar. 7, 2014); Investment 
Adviser Association (``IAA'') (Mar. 10, 2014); Japan Financial 
Markets Council (``JFMC'') (Mar. 4, 2014); Japanese Bankers 
Association (``JBA'') (Mar. 7, 2014); Securities Industry and 
Financial Markets Association, Futures Industry Association, and 
Financial Services Roundtable (``SIFMA/FIA/FSR'') (Mar. 10, 2014); 
Soci[eacute]t[eacute] G[eacute]n[eacute]rale (``SG'') (Mar. 10, 
2014). The associated comment file is available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1452&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1_50. Although the comment file includes records 
of 22 comments, five were either duplicate submissions or not 
responsive to the ANE Request for Comment.
    \234\ See, e.g., Barclays at 3 n.11; IIB at 4-5; ISDA at 6-7; 
SIFMA/FIA/FSR at 2, A-9-A-10; SG at 2 (adopting the ANE Staff 
Advisory would extend the Commission's regulations ``to swaps whose 
risk lies totally offshore'' and that do not pose a high risk to the 
U.S. financial system).
    \235\ See, e.g., Coalition at 2 (non-U.S. SDs use U.S. personnel 
to arrange, negotiate, or execute swaps because they have particular 
subject matter expertise for or due to the location of their clients 
across time zone); European Commission at 1; IIB at 7-8 n.18; IAA at 
2; ISDA at 4; JFMC at 2-3; SIFMA/FIA/FSR at A-4; SG at 3 (a non-U.S. 
SD may use salespersons in the United States if the ANE Transaction 
is linked to a USD instrument).
    \236\ See, e.g., Barclays at 4-5; European Commission at 3 
(whether negotiation of a master agreement by U.S. middle office 
staff would trigger application of the ANE Staff Advisory is 
unclear); IAA at 5 (``[T]he terms `arranging' and `negotiating' are 
overly broad and may encompass activities that are incidental to a 
swap transaction,'' such as providing market or pricing 
information); SIFMA/FIA/FSR at A-12 (arranging and negotiating 
trading relationships and legal documentation are ``middle- and 
back-office operations'' and should not be included); SG at 7-8 
(``regularly'' is an arbitrary concept that cannot be made workable, 
and programming trading systems to interpret ``arranging, 
negotiating, or executing'' on a trade-by-trade basis would not be 
feasible).
    \237\ See, e.g., ABASA at 2 (adopting the ANE Staff Advisory 
would ``impose unnecessary compliance burdens on swaps market 
participants, encourage them to re-locate jobs and activities 
outside the United States to accommodate non-U.S. client demands, 
and fragment market liquidity''); Coalition at 3 (emphasizing the 
impact on non-U.S. affiliates of U.S. end users, such as increased 
hedging costs and reduced access to registered counterparties); IIB 
at 7-8; ISDA at 4; JFMC at 3; SG at 8-9. See also IAA at 3 
(expressing concern that non-U.S. clients may avoid hiring U.S. 
asset managers to avoid application of the ANE Staff Advisory).
    \238\ See ESMA at 1.
    \239\ See European Commission at 1.
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    A few commenters, however, supported the ANE Staff Advisory.\240\ 
They argued that the Commission has jurisdiction over swap activities 
occurring in the United States \241\ and expressed concern that the 
Commission's failure to assert such jurisdiction would create a 
substantial loophole, allowing U.S. financial firms to operate in the 
United States without Dodd-Frank Act oversight by merely routing swaps 
through a non-U.S. affiliate.\242\ They further argued that arranging, 
negotiating, or executing swaps are functions normally performed by 
brokers, traders, and salespersons

[[Page 978]]

and are economically central to the business of swap dealing.\243\
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    \240\ See AFR; Better Markets; IATP.
    \241\ See AFR at 2 (CEA section 2(i) clearly sets the statutory 
jurisdiction of CFTC rules to include all activities conducted 
inside the United States); Better Markets at 3 (the ANE Staff 
Advisory ``represents the only reasonable interpretation of 
Congress's mandate to regulate swaps transactions with a `direct and 
significant connection with activities in, or effect on, commerce of 
the United States'''); IATP at 1 (``It should be self-evident that 
the swap activities in the United States of non-U.S. persons fall 
under the Commission's jurisdiction.'').
    \242\ See AFR at 3 (failure to adopt the ANE Staff Advisory 
``could mean that U.S. firms operating in the U.S. would face 
different rules for the same transactions as compared to competitor 
firms also operating in the very same market and location, perhaps 
literally next door, who had arranged to route transactions through 
a nominally foreign subsidiary''); Better Markets at 3 (allowing 
registered SDs to book transactions overseas but otherwise handle 
the swap inside the United States would ``create a gaping 
loophole,'' resulting in ``keystroke off-shoring of the bookings, 
but otherwise the on-shoring of the core activities associated with 
the transaction'').
    \243\ See AFR at 2-3, 5; Better Markets at 5 (brokers, 
structurers, traders, and salesmen ``collectively comprise the 
general understanding of the core front office'').
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    In addition to consideration of the foregoing comments, the 
Commission also considered a report the U.S. Treasury Department issued 
in October 2017, which expressed the view that the SEC and the CFTC 
should ``reconsider the implications'' of applying the Dodd-Frank Act 
requirements to certain transactions ``merely on the basis that U.S.-
located personnel arrange, negotiate, or execute the swap, especially 
for entities in comparably regulated jurisdictions.'' \244\
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    \244\ See U.S. Department of Treasury, A Financial System That 
Creates Economic Opportunities: Capital Markets, at 133-36 (Oct. 
2017), available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.
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    Based on the Commission's consideration of its experience under the 
Guidance, the comments it has received, respect for international 
comity, and the Commission's desire to focus its authority on potential 
significant risks to the U.S. financial system, the Commission has 
determined that ANE Transactions will not be considered a relevant 
factor for purposes of applying the Proposed Rule. Accordingly, under 
the Proposed Rule, all foreign-based swaps entered into between a non-
U.S. swap entity and a non-U.S. person are treated the same regardless 
of whether the swap is an ANE Transaction. To the extent the Proposed 
Rule is finalized, this treatment would effectively supersede the ANE 
Staff Advisory with respect to the application of the group B and C 
requirements (discussed below) to ANE Transactions.
    With respect to its experience, the Commission notes that the ANE 
No-Action Relief, which went into effect immediately after issuance of 
the ANE Staff Advisory, generally relieved non-U.S. swap entities from 
the obligation to comply with most transaction-level requirements when 
entering into swaps with most non-U.S. persons.\245\ In the intervening 
period, the Commission has not found a negative impact on either its 
ability to effectively oversee non-US swap entities, nor the integrity 
and transparency of U.S. derivatives markets.
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    \245\ Specifically, non-U.S. persons that are neither guaranteed 
nor conduit affiliates, as described in the Guidance.
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    In the interest of international comity, under the Proposed Rule, 
as under the Guidance, swaps between certain non-U.S. persons would 
qualify for an exception from application of certain CFTC 
requirements.\246\ ANE Transactions also involve swaps between non-U.S. 
persons, and thus the Commission has considered whether the U.S. aspect 
of ANE Transactions should override its general view that such 
transactions should qualify for the same relief. A person that, in 
connection with its dealing activity, engages in market-facing activity 
using personnel located in the United States is conducting a 
substantial aspect of its dealing business in the United States. But, 
because the transactions involve two non-U.S. persons, and the 
financial risk of the transactions lies outside the United States, the 
Commission considers the extent to which the underlying regulatory 
objectives of the Dodd-Frank Act would be advanced in light of other 
policy considerations, including undue market distortions and 
international comity, when making the determination as to whether the 
Dodd-Frank Act swap requirements should apply to ANE Transactions.
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    \246\ Consisting of transaction-level requirements under the 
Guidance and group B and C requirements under the Proposed Rule, as 
discussed below.
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    As a preliminary matter, the Commission notes that the consequences 
of disapplication of the Dodd-Frank Act swap requirements would be 
mitigated in two respects. First, persons engaging in any aspect of 
swap transactions within the U.S. remain subject to the CEA and 
Commission regulations prohibiting the employment, or attempted 
employment, of manipulative, fraudulent, or deceptive devices, such as 
section 6(c)(1) of the CEA,\247\ and Commission regulation 180.1.\248\ 
The Commission thus would retain anti-fraud and anti-manipulation 
authority, and would continue to monitor the trading practices of non-
U.S. persons that occur within the territory of the United States in 
order to enforce a high standard of customer protection and market 
integrity. Even where a swap is entered into by two non-U.S. persons, 
the United States has a significant interest in deterring fraudulent or 
manipulative conduct occurring within its borders and cannot be a haven 
for such activity.
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    \247\ 7 U.S.C. 9(1).
    \248\ 17 CFR 180.1.
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    Second, with respect to more specific regulation of swap dealing in 
accordance with the Commission's swap regime, the Commission notes 
that, in most cases, non-U.S. persons entering into ANE Transactions 
would be subject to regulation and oversight in their home 
jurisdictions similar to the Commission's transaction-level 
requirements as most of the major swap trading centers have implemented 
similar risk mitigation requirements.\249\
---------------------------------------------------------------------------

    \249\ See 2019 FSB Progress Report, Table M.
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    With respect to market distortion, the Commission gives weight to 
commenters that argued that application of transaction-level 
requirements to ANE Transactions would cause non-U.S. SDs to relocate 
personnel to other countries (or otherwise terminate agency contracts 
with U.S.-based agents) in order to avoid Dodd-Frank Act swap 
regulation or having to interpret and apply what the commenters 
considered a challenging ANE analysis, thereby potentially increasing 
market fragmentation.\250\
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    \250\ See, e.g., ABASA at 2 (adopting the ANE Staff Advisory 
would ``impose unnecessary compliance burdens on swaps market 
participants, encourage them to re-locate jobs and activities 
outside the United States to accommodate non-U.S. client demands, 
and fragment market liquidity''); Coalition at 3 (emphasizing the 
impact on non-U.S. affiliates of U.S. end users, such as increased 
hedging costs and reduced access to registered counterparties); IIB 
at 7-8; ISDA at 4; JFMC at 3; SG at 8-9. See also IAA at 3 
(expressing concern that non-U.S. clients may avoid hiring U.S. 
asset managers to avoid application of the ANE Staff Advisory).
---------------------------------------------------------------------------

    The Commission also gives weight to the regulatory interests of the 
home jurisdictions of non-U.S. persons engaged in ANE Transactions. 
Because the risk of the resulting swaps lies in those home countries 
and not the U.S. financial system, the Commission recognizes that, with 
the exception of enforcing the prohibition on fraudulent or 
manipulative conduct taking place in the United States, non-U.S. 
regulators will have a greater incentive to regulate the swap dealing 
activities of such non-U.S. persons--such as, for example, with respect 
to business conduct standards with counterparties, appropriate 
documentation, and recordkeeping. In these circumstances, where the 
risk lies outside the U.S. financial system, the Commission recognizes 
the greater supervisory interest of the authorities in the home 
jurisdictions of the non-U.S. persons. The Commission is also not aware 
of any major swap regulatory jurisdiction that applies its regulatory 
regime to U.S. entities engaging in ANE Transactions within its 
territory.
    In sum, the Commission has determined that the mitigating effect of 
the anti-fraud and anti-manipulation authority retained by the 
Commission and the prevalence of applicable regulatory requirements 
similar to the Commission's own, the likelihood of disruptive 
avoidance, the Commission's respect for the regulatory interests of the 
foreign jurisdictions where the actual

[[Page 979]]

financial risks of ANE Transactions lie in accordance with the 
principles of international comity, and the awareness that application 
of its swap requirements in the ANE context would make the Commission 
an outlier among the major swap regulatory jurisdictions, outweighs the 
Commission's regulatory interest in applying its swap requirements to 
ANE Transactions differently than such are otherwise proposed to be 
applied to swaps between Other Non-U.S. Persons.

B. Request for Comment

    The Commission invites comment on all aspects of the proposed 
treatment of ANE Transactions described in section V, and specifically 
requests comments on the following questions. Please explain your 
responses and provide alternatives to the Proposed Rule, where 
applicable.
    (25) Should the Commission apply certain transaction-level 
requirements (e.g., Sec.  23.433 (fair dealing)) to SDs and MSPs with 
respect to ANE Transactions, or are the existing anti-fraud and anti-
manipulation powers under the CEA and Commission regulations adequate 
safeguards to address any wrongdoing arising from ANE Transactions.
    (26) Should the Commission consider adopting a territorial approach 
similar to the SEC, where non-US counterparties engaging in ANE 
Transactions would count such transactions towards their de minimis 
thresholds and be subject to certain transaction-level 
requirements,\251\ rather than the proposed comity-based approach of 
excluding ANE Transactions from the Proposed Rule?
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    \251\ See Security-Based Swap Transactions Connected with a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or 
Executed by Personnel Located in a U.S. Branch or Office or 
Security-Based Swap Dealer De Minimis Exception, 81 FR 8598 (Feb. 
19, 2016); Proposed Rule Amendments and Guidance Addressing Cross-
Border Application of Certain Security-Based Swap Requirements, 84 
FR 24206 (May 24, 2019).
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VI. Proposed Exceptions From Group B and Group C Requirements, 
Substituted Compliance for Group A and Group B Requirements, and 
Comparability Determinations

    Title VII of the Dodd-Frank Act and Commission regulations 
thereunder establish a broad range of requirements applicable to SDs 
and MSPs, including requirements regarding risk management and internal 
and external business conduct. These requirements are designed to 
reduce systemic risk, increase counterparty protections, and increase 
market efficiency, orderliness, and transparency.\252\ Consistent with 
the Guidance,\253\ SDs and MSPs (whether or not U.S. persons) are 
subject to all of the Commission regulations described below by virtue 
of their status as Commission registrants. Put differently, the 
Commission's view is that if an entity is required to register as an SD 
or MSP under the Commission's interpretation of section 2(i) of the 
CEA, then such entity should be subject to these regulations with 
respect to all of its swap activities. As explained further below, such 
an approach is necessary because of the important role that the SD and 
MSP requirements play in the proper operation of a registrant.
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    \252\ See, e.g., Entities Rule, 77 FR at 30629, 30703.
    \253\ See Guidance, 78 FR at 45342. The Commission notes that 
while the Guidance states that all swap entities (wherever located) 
are subject to all of the CFTC's Title VII requirements, the 
Guidance went on to describe how and when the Commission would 
expect swap entities to comply with specific requirements and when 
substituted compliance would be available under its non-binding 
framework.
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    However, consistent with section 2(i) of the CEA, in the interest 
of international comity, and for other reasons discussed in this 
release, the Commission is proposing exceptions from, and a substituted 
compliance process for, certain regulations applicable to registered 
SDs and MSPs, as appropriate.\254\ Further, the Proposed Rule would 
create a framework for comparability determinations that emphasizes a 
holistic, outcomes-based approach that is grounded in principles of 
international comity.
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    \254\ The Commission intends to separately address the cross-
border application of the Title VII requirements addressed in the 
Guidance that are not discussed in this release (e.g., capital 
adequacy, clearing and swap processing, mandatory trade execution, 
swap data repository reporting, large trader reporting, and real-
time public reporting). With respect to capital adequacy 
requirements for SDs and MSPs, the Commission notes that it has 
proposed but not yet adopted final regulations. See the Commission's 
proposed capital adequacy regulations in Capital Requirements of 
Swap Dealers and Major Swap Participants, 84 FR 69664 (proposed Dec. 
19, 2019); Capital Requirements of Swap Dealers and Major Swap 
Participants, 81 FR 91252 (proposed Dec. 16, 2016); and Capital 
Requirements of Swap Dealers and Major Swap Participants, 76 FR 
27802 (proposed May 12, 2011).
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A. Classification and Application of Certain Regulatory Requirements--
Group A, Group B, and Group C Requirements

    The Guidance applied a bifurcated approach to the classification of 
certain regulatory requirements applicable to SDs and MSPs, based on 
whether the requirement applies to the firm as a whole (``Entity-Level 
Requirement'' or ``ELR'') or to the individual swap or trading 
relationship (``Transaction-Level Requirement'' or ``TLR'').\255\
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    \255\ See, e.g., Guidance, 78 FR at 45331.
---------------------------------------------------------------------------

    The Guidance categorized the following regulatory requirements as 
ELRs: (1) Capital adequacy; (2) chief compliance officer; (3) risk 
management; (4) swap data recordkeeping; (5) swap data repository 
(``SDR'') reporting; and (6) large trader reporting.\256\ The Guidance 
further divided ELRs into two subcategories.\257\ The first category of 
ELRs includes: (1) Capital adequacy; (2) chief compliance officer; (3) 
risk management; and (4) certain swap data recordkeeping requirements 
\258\ (``First Category ELRs'').\259\ The second category of ELRs 
includes: (1) SDR reporting; (2) certain aspects of swap data 
recordkeeping relating to complaints and marketing and sales materials 
under Sec. Sec.  23.201(b)(3) and 23.201(b)(4); and (3) large trader 
reporting (``Second Category ELRs'').\260\
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    \256\ See, e.g., id.
    \257\ See, e.g., id.
    \258\ Swap data recordkeeping under 17 CFR 23.201 and 23.203 
(except certain aspects of swap data recordkeeping relating to 
complaints and sales materials).
    \259\ See, e.g., Guidance, 78 FR at 45331.
    \260\ See, e.g., id.
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    The Guidance categorized the following regulatory requirements as 
TLRs: (1) Required clearing and swap processing; (2) margin (and 
segregation) for uncleared swaps; (3) mandatory trade execution; (4) 
swap trading relationship documentation; (5) portfolio reconciliation 
and compression; (6) real-time public reporting; (7) trade 
confirmation; (8) daily trading records; and (9) external business 
conduct standards.\261\ As with the ELRs, the Guidance similarly 
subdivided TLRs into two subcategories.\262\ The Commission determined 
that all TLRs, other than external business conduct standards, address 
risk mitigation and market transparency.\263\ Accordingly, under the 
Guidance, all TLRs except external business conduct standards are 
classified as ``Category A TLRs,'' whereas external business conduct 
standards are classified as ``Category B TLRs.'' \264\ Under the 
Guidance, generally, whether a specific Commission requirement applies 
to a swap entity and a swap and whether substituted compliance is 
available depends on the classification of the requirement as an ELR or 
TLR and the sub-classification of each and the type

[[Page 980]]

of swap entity and, in certain cases, the counterparty to a specific 
swap.\265\
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    \261\ See, e.g., id. at 45333.
    \262\ See, e.g., id.
    \263\ See, e.g., id.
    \264\ See, e.g., id.
    \265\ See, e.g., id. at 45337-38.
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    To avoid confusion that may arise from using the ELR/TLR 
classification in the Proposed Rule, given that the Proposed Rule does 
not address the same set of Commission regulations as the Guidance, the 
Commission is proposing to classify certain of its regulations as group 
A, group B, and group C requirements for purposes of determining the 
availability of certain exceptions from, and/or substituted compliance 
for, such regulations. A description of each of the group A 
requirements, group B requirements, and group C requirements is below.
1. Group A Requirements
    The group A requirements include: (1) Chief compliance officer; (2) 
risk management; (3) swap data recordkeeping; and (4) antitrust 
considerations. Specifically, the group A requirements consist of the 
requirements set forth in Sec. Sec.  3.3, 23.201, 23.203, 23.600, 
23.601, 23.602, 23.603, 23.605, 23.606, 23.607, and 23.609,\266\ each 
discussed below. The Commission believes that these requirements would 
be impractical to apply only to specific transactions or counterparty 
relationships, and are most effective when applied consistently across 
the entire enterprise. They ensure that swap entities implement and 
maintain a comprehensive and robust system of internal controls to 
ensure the financial integrity of the firm, and, in turn, the 
protection of the financial system. Together with other Commission 
requirements, they constitute an important line of defense against 
financial, operational, and compliance risks that could lead to a 
firm's default. Requiring swap entities to rigorously monitor and 
address the risks they incur as part of their day-to-day businesses 
lowers the registrants' risk of default--and ultimately protects the 
public and the financial system. For this reason, the Commission has 
strong supervisory interests in ensuring that swap entities (whether 
domestic or foreign) are subject to the group A requirements or 
comparably rigorous standards.
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    \266\ 17 CFR 3.3, 23.201, 23.203, 23.600, 23.601, 23.602, 
23.603, 23.605, 23.606, 23.607, and 23.609.
---------------------------------------------------------------------------

(i) Chief Compliance Officer
    Section 4s(k) of the CEA requires that each SD and MSP designate an 
individual to serve as its chief compliance officer (``CCO'') and 
specifies certain duties of the CCO.\267\ Pursuant to section 4s(k), 
the Commission adopted Sec.  3.3,\268\ which requires SDs and MSPs to 
designate a CCO responsible for administering the firm's compliance 
policies and procedures, reporting directly to the board of directors 
or a senior officer of the SD or MSP, as well as preparing and filing 
with the Commission a certified annual report discussing the 
registrant's compliance policies and activities. The CCO function is an 
integral element of a firm's risk management and oversight and the 
Commission's effort to foster a strong culture of compliance within SDs 
and MSPs.
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    \267\ 7 U.S.C. 6s(k).
    \268\ 17 CFR 3.3. See Swap Dealer and Major Swap Participant 
Recordkeeping, Reporting, and Duties Rules; Futures Commission 
Merchant and Introducing Broker Conflicts of Interest Rules; and 
Chief Compliance Officer Rules for Swap Dealers, Major Swap 
Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3, 
2012) (``Final SD and MSP Recordkeeping, Reporting, and Duties 
Rule''). In 2018, the Commission adopted amendments to the CCO 
requirements. See Chief Compliance Officer Duties and Annual Report 
Requirements for Futures Commission Merchants, Swap Dealers, and 
Major Swap Participants, 83 FR 43510 (Aug. 27, 2018).
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(ii) Risk Management
    Section 4s(j) of the CEA requires each SD and MSP to establish 
internal policies and procedures designed to, among other things, 
address risk management, monitor compliance with position limits, 
prevent conflicts of interest, and promote diligent supervision, as 
well as maintain business continuity and disaster recovery 
programs.\269\ The Commission implemented these provisions in 
Sec. Sec.  23.600, 23.601, 23.602, 23.603, 23.605, and 23.606.\270\ The 
Commission also adopted Sec.  23.609,\271\ which requires certain risk 
management procedures for SDs or MSPs that are clearing members of a 
DCO.\272\ Collectively, these requirements help to establish a 
comprehensive internal risk management program for SDs and MSPs, which 
is critical to effective systemic risk management for the overall swap 
market.
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    \269\ 7 U.S.C. 6s(j).
    \270\ 17 CFR 23.600, 23.601, 23.602, 23.603, 23.605, and 23.606. 
See Final SD and MSP Recordkeeping, Reporting, and Duties Rule, 77 
FR 20128 (addressing rules related to risk management programs, 
monitoring of position limits, diligent supervision, business 
continuity and disaster recovery, conflicts of interest policies and 
procedures, and general information availability).
    \271\ 17 CFR 23.609.
    \272\ See Customer Clearing Documentation, Timing of Acceptance 
for Clearing, and Clearing Member Risk Management, 77 FR 21278 (Apr. 
9, 2012).
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(iii) Swap Data Recordkeeping
    CEA section 4s(f)(1)(B) requires SDs and MSPs to keep books and 
records for all activities related to their swap business.\273\ 
Sections 4s(g)(1) and (4) require SDs and MSPs to maintain trading 
records for each swap and all related records, as well as a complete 
audit trail for comprehensive trade reconstructions.\274\ Additionally, 
CEA section 4s(f)(1) requires SDs and MSPs to ``make such reports as 
are required by the Commission by rule or regulation regarding the 
transactions and positions and financial condition of'' the registered 
SD or MSP.\275\ Further, CEA section 4s(h) requires SDs and MSPs to 
``conform with such business conduct standards . . . as may be 
prescribed by the Commission by rule or regulation.'' \276\
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    \273\ 7 U.S.C. 6s(f)(1)(B).
    \274\ 7 U.S.C. 6s(g)(1) and (4).
    \275\ 7 U.S.C. 6s(f)(1).
    \276\ 7 U.S.C. 6s(h)(1). See 7 U.S.C. 6s(h)(3).
---------------------------------------------------------------------------

    Pursuant to these provisions, the Commission promulgated final 
rules that set forth certain reporting and recordkeeping for SDs and 
MSPs.\277\ Specifically, Sec. Sec.  23.201 and 23.203 \278\ require SDs 
and MSPs to keep records including complete transaction and position 
information for all swap activities, including documentation on which 
trade information is originally recorded. In particular, Sec.  23.201 
states that each SD and MSP shall keep full, complete, and systematic 
records of all activities related to its business as a SD or MSP.\279\ 
Such records must include, among other things, a record of each 
complaint received by the SD or MSP concerning any partner, member, 
officer, employee, or agent,\280\ as well as all marketing and sales 
presentations, advertisements, literature, and communications.\281\ 
Commission regulation 23.203 \282\ requires, among other things, that 
records (other than swap data reported in accordance with part 45 of 
the Commission's regulations) \283\ be maintained in accordance with 
Sec.  1.31.\284\ Commission regulation 1.31 requires that records 
relating to swaps be maintained for specific durations, including that 
records of swaps be maintained for a minimum of five years and as much 
as the life of the swap plus five years, and that most records be 
``readily accessible'' for the entire record keeping period.\285\
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    \277\ See Final SD and MSP Recordkeeping, Reporting, and Duties 
Rule, 77 FR 20128.
    \278\ 17 CFR 23.201 and 203.
    \279\ 17 CFR 23.201(b).
    \280\ 17 CFR 23.201(b)(3)(i).
    \281\ 17 CFR 23.201(b)(4).
    \282\ 17 CFR 23.203.
    \283\ 17 CFR 45.
    \284\ 17 CFR 1.31.
    \285\ 17 CFR 1.31(b).

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[[Page 981]]

(iv) Antitrust Considerations
    Section 4s(j)(6) of the CEA prohibits an SD or MSP from adopting 
any process or taking any action that results in any unreasonable 
restraint of trade or imposes any material anticompetitive burden on 
trading or clearing, unless necessary or appropriate to achieve the 
purposes of the CEA.\286\ The Commission promulgated this requirement 
in Sec.  23.607(a) \287\ and also adopted Sec.  23.607(b), which 
requires SDs and MSPs to adopt policies and procedures to prevent 
actions that result in unreasonable restraints of trade or impose any 
material anticompetitive burden on trading or clearing.\288\
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    \286\ 7 U.S.C. 6s(j)(6).
    \287\ 17 CFR 23.607(a).
    \288\ 17 CFR 23.607(b).
---------------------------------------------------------------------------

2. Group B Requirements
    The group B requirements include: (1) Swap trading relationship 
documentation; (2) portfolio reconciliation and compression; (3) trade 
confirmation; and (4) daily trading records. Specifically, the group B 
requirements consist of the requirements set forth in Sec. Sec.  
23.202, 23.501, 23.502, 23.503, and 23.504,\289\ each discussed below. 
The group B requirements relate to risk mitigation and the maintenance 
of good recordkeeping and business practices.\290\ Unlike the group A 
requirements, the Commission believes that the group B requirements can 
practically be applied on a bifurcated basis between domestic and 
foreign transactions or counterparty relationships and, thus, do not 
need to be applied uniformly across an entire enterprise. This allows 
the Commission to have greater flexibility with respect to the 
application of these requirements to non-U.S. swap entities and foreign 
branches of U.S. swap entities.
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    \289\ 17 CFR 23.202, 23.501, 23.502, 23.503, and 23.504.
    \290\ See, e.g., Int'l Org. of Sec. Comm'ns, Risk Mitigation 
Standards for Non-Centrally Cleared OTC Derivatives, IOSCO Doc. 
FR01/2015 (Jan. 28, 2015) (``IOSCO Risk Management Standards''), 
available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD469.pdf (discussing, among other things, the objectives and 
benefits of trading relationship documentation, trade confirmation, 
reconciliation, and portfolio compression requirements). In 
addition, the group B requirements also provide customer protection 
and market transparency benefits.
---------------------------------------------------------------------------

(i) Swap Trading Relationship Documentation
    CEA section 4s(i) requires each SD and MSP to conform to Commission 
standards for the timely and accurate confirmation, processing, 
netting, documentation, and valuation of swaps.\291\ Pursuant to 
section 4s(i), the Commission adopted, among other regulations, Sec.  
23.504.\292\ Regulation 23.504(a) requires SDs and MSPs to ``establish, 
maintain and follow written policies and procedures'' to ensure that 
the SD or MSP executes written swap trading relationship documentation, 
and Sec.  23.504(c) requires that documentation policies and procedures 
be audited periodically by an independent auditor to identify material 
weaknesses.\293\ Under Sec.  23.504(b), the swap trading relationship 
documentation must include, among other things: (1) All terms governing 
the trading relationship between the SD or MSP and its counterparty; 
(2) credit support arrangements; (3) investment and re-hypothecation 
terms for assets used as margin for uncleared swaps; and (4) custodial 
arrangements.\294\ Swap documentation standards facilitate sound risk 
management and may promote standardization of documents and 
transactions, which are key conditions for central clearing, and lead 
to other operational efficiencies, including improved valuation.
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    \291\ 7 U.S.C. 6s(i).
    \292\ 17 CFR 23.504. See Confirmation, Portfolio Reconciliation, 
Portfolio Compression, and Swap Trading Relationship Documentation 
Requirements for Swap Dealers and Major Swap Participants, 77 FR 
55904 (Sept. 11, 2012) (``Final Confirmation, Risk Mitigation, and 
Documentation Rules'').
    \293\ 17 CFR 23.504(a)(2) and (c).
    \294\ 17 CFR 23.504(b).
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(ii) Portfolio Reconciliation and Compression
    CEA section 4s(i) directs the Commission to prescribe regulations 
for the timely and accurate processing and netting of all swaps entered 
into by SDs and MSPs.\295\ Pursuant to CEA section 4s(i), the 
Commission adopted Sec. Sec.  23.502 and 23.503,\296\ which require SDs 
and MSPs to perform portfolio reconciliation and compression, 
respectively, for their swaps.\297\ Portfolio reconciliation is a post-
execution risk management tool designed to ensure accurate confirmation 
of a swap's terms and to identify and resolve any discrepancies between 
counterparties regarding the valuation of the swap. Portfolio 
compression is a post-trade processing and netting mechanism that is 
intended to ensure timely, accurate processing and netting of 
swaps.\298\ Further, Sec.  23.503 requires all SDs and MSPs to 
establish policies and procedures for terminating fully offsetting 
uncleared swaps, when appropriate, and periodically participating in 
bilateral and/or multilateral portfolio compression exercises for 
uncleared swaps with other SDs or MSPs or through a third party.\299\ 
The rule also requires policies and procedures for engaging in such 
exercises for uncleared swaps with non-SDs and non-MSPs upon 
request.\300\
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    \295\ 7 U.S.C. 6s(i).
    \296\ 17 CFR 23.502 and 503. See Final Confirmation, Risk 
Mitigation, and Documentation Rules, 77 FR 55904.
    \297\ See 17 CFR 23.502 and 503.
    \298\ For example, the reduced transaction count may decrease 
operational risk as there are fewer trades to maintain, process, and 
settle.
    \299\ See 17 CFR 23.503(a).
    \300\ 17 CFR 23.503(b).
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(iii) Trade Confirmation
    Section 4s(i) of the CEA requires that each SD and MSP must comply 
with the Commission's regulations prescribing timely and accurate 
confirmation of swaps.\301\ The Commission adopted Sec.  23.501,\302\ 
which requires, among other things, timely and accurate confirmation of 
swap transactions (which includes execution, termination, assignment, 
novation, exchange, transfer, amendment, conveyance, or extinguishing 
of rights or obligations of a swap) among SDs and MSPs by the end of 
the first business day following the day of execution.\303\ Timely and 
accurate confirmation of swaps--together with portfolio reconciliation 
and compression--are important post-trade processing mechanisms for 
reducing risks and improving operational efficiency.\304\
---------------------------------------------------------------------------

    \301\ 7 U.S.C. 6s(i).
    \302\ 17 CFR 23.501. See Final Confirmation, Risk Mitigation, 
and Documentation Rules, 77 FR 55904.
    \303\ 17 CFR 23.501(a)(1).
    \304\ Additionally, the Commission notes that Sec.  23.504(b)(2) 
requires that the swap trading relationship documentation of SDs and 
MSPs must include all confirmations of swap transactions. 17 CFR 
23.504(b)(2).
---------------------------------------------------------------------------

(iv) Daily Trading Records
    Pursuant to CEA section 4s(g),\305\ the Commission adopted Sec.  
23.202,\306\ which requires SDs and MSPs to maintain daily trading 
records, including records of trade information related to pre-
execution, execution, and post-execution data that is needed to conduct 
a comprehensive and accurate trade reconstruction for each swap. The 
regulation also requires that records be kept of cash or forward 
transactions used to hedge, mitigate the risk of, or offset any swap 
held by the SD or MSP.\307\ Accurate and timely records regarding all 
phases of a swap transaction can serve to greatly enhance a firm's 
internal supervision, as well as

[[Page 982]]

the Commission's ability to detect and address market or regulatory 
abuses or evasion.
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    \305\ 7 U.S.C. 6s(g).
    \306\ 17 CFR 23.202. See Final SD and MSP Recordkeeping, 
Reporting, and Duties Rule, 77 FR 20128.
    \307\ 17 CFR 23.202(b).
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3. Group C Requirements
    Pursuant to CEA section 4s(h),\308\ the Commission adopted external 
business conduct rules, which establish certain additional business 
conduct standards governing the conduct of SDs and MSPs in dealing with 
their swap counterparties.\309\ The group C requirements are set forth 
in Sec. Sec.  23.400-451.\310\ Broadly speaking, these rules are 
designed to enhance counterparty protections by establishing robust 
requirements regarding SDs' and MSPs' conduct with their 
counterparties. Under these rules, SDs and MSPs are required to, among 
other things, conduct due diligence on their counterparties to verify 
eligibility to trade (including eligible contract participant status), 
refrain from engaging in abusive market practices, provide disclosure 
of material information about the swap to their counterparties, provide 
a daily mid-market mark for uncleared swaps, and, when recommending a 
swap to a counterparty, make a determination as to the suitability of 
the swap for the counterparty based on reasonable diligence concerning 
the counterparty.
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    \308\ 7 U.S.C. 6s(h).
    \309\ See Business Conduct Standards for Swap Dealers and Major 
Swap Participants with Counterparties, 77 FR 9734 (Feb. 17, 2012).
    \310\ 17 CFR 23.400-451.
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    In the Commission's view, the group C requirements focus on 
customer protection and have a more attenuated link to, and are 
therefore distinguishable from, systemic and market-oriented 
protections in the group A and group B requirements. Additionally, as 
discussed below, the Commission believes that the foreign jurisdictions 
in which non-U.S. persons and foreign branches of U.S. swap entities 
are located are likely to have a significant interest in the type of 
business conduct standards that would be applicable to transactions 
with such non-U.S. persons and foreign branches within their 
jurisdiction, and, consistent with section 2(i) of the CEA and in the 
interest of international comity, it is generally appropriate to defer 
to such jurisdictions in applying, or not applying, such standards to 
foreign-based swaps with foreign counterparties.
4. Request for Comment
    The Commission invites comment on all aspects of the Proposed Rule, 
including the classifications of Title VII requirements discussed 
above, and specifically requests comments on the following questions. 
Please explain your responses and provide alternatives to the relevant 
portions of the Proposed Rule, where applicable.
    (27) On the classification of group A, group B, and group C 
requirements, should the Commission use these classifications, revert 
to the ELR and TLR classifications used in the Guidance, or otherwise 
classify the relevant Title VII requirements?
    (28) To the extent that you agree with the Commission's proposed 
use of the group A, group B, and group C requirements classification, 
should any of the requirements be re-classified or removed from such 
groups? Should requirements not included of any of the groups be added 
to any of them? If so, which requirements?

B. Proposed Exceptions

    Consistent with section 2(i) of the CEA, the Commission is 
proposing four exceptions from certain Commission regulations for 
foreign-based swaps in the Proposed Rule.
    First, the Commission is proposing an exception from certain group 
B and C requirements for certain anonymous, exchange-traded, and 
cleared foreign-based swaps (``Exchange-Traded Exception'').
    Second, the Commission is proposing an exception from the group C 
requirements for certain foreign-based swaps with foreign 
counterparties (``Foreign Swap Group C Exception'').
    Third, the Commission is proposing an exception from the group B 
requirements for the foreign-based swaps of certain non-U.S. swap 
entities with certain foreign counterparties (``Non-U.S. Swap Entity 
Group B Exception'').
    Fourth, the Commission is proposing an exception from the group B 
requirements for certain foreign-based swaps of foreign branches of 
U.S. swap entities with certain foreign counterparties, subject to 
certain limitations, including a quarterly cap on the amount of such 
swaps (``Foreign Branch Group B Exception'').
    While these exceptions each have different eligibility requirements 
discussed below, a common requirement is that they would be available 
only to foreign-based swaps. As discussed in section II.G above, under 
the Proposed Rule, a foreign-based swap would mean: (1) A swap by a 
non-U.S. swap entity, except for a swap conducted through a U.S. 
branch; or (2) a swap conducted through a foreign branch. Under the 
Proposed Rule, swaps that do not meet these requirements would be 
treated as domestic swaps for purposes of applying the group B and 
group C requirements and, therefore, would not be eligible for the 
above exceptions.
    Pursuant to the Proposed Rule, swap entities that avail themselves 
of these exceptions for their foreign-based swaps would only be 
required to comply with the applicable laws of the foreign 
jurisdiction(s) to which they are subject, rather than the relevant 
Commission requirements, for such swaps. However, the Commission notes 
that, notwithstanding these exceptions, swap entities would remain 
subject to the CEA and Commission regulations not covered by the 
exceptions, including the prohibition on the employment, or attempted 
employment, of manipulative and deceptive devices in Sec.  180.1 of the 
Commission's regulations.\311\ In addition, the Commission would expect 
swap entities to address any significant risk that may arise as a 
result of the utilization of one or more exceptions in their risk 
management programs required pursuant to Sec.  23.600.\312\
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    \311\ 17 CFR 180.1.
    \312\ 17 CFR 23.600.
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1. Exchange-Traded Exception
    The Commission is proposing that, with respect to its foreign-based 
swaps, each non-U.S. swap entity and foreign branch of a U.S. swap 
entity would be excepted from the group B requirements (other than the 
daily trading records requirements in Sec. Sec.  23.202(a) through 
23.202(a)(1)) \313\ and the group C requirements with respect to any 
swap entered into on a DCM, a registered SEF or a SEF exempted from 
registration by the Commission pursuant to section 5h(g) of the CEA, or 
an FBOT registered with the Commission pursuant to part 48 of its 
regulations \314\ where, in each case, the swap is cleared through a 
registered DCO or a clearing organization that has been exempted from 
registration by the Commission pursuant to section 5b(h) of the CEA, 
and the swap entity does not know the identity of the counterparty to 
the swap prior to execution.\315\
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    \313\ 17 CFR 23.202(a) through (a)(1).
    \314\ The Commission would consider the proposed exception 
described herein also to apply with respect to an FBOT that provides 
direct access to its order entry and trade matching system from 
within the U.S. pursuant to no-action relief issued by Commission 
staff.
    \315\ Proposed Sec.  23.23(e)(1)(i). This approach is similar to 
the Guidance. See Guidance, 78 FR at 45351-52 and 45360-61. As 
discussed in the Guidance and below, the Commission recognizes that 
certain of the group B requirements and group C requirements are not 
applicable to swaps meeting the requirements of the exception in any 
event. However, the Commission nonetheless wishes to expressly 
provide that the swaps described in the exception are excepted from 
all of the group B and group C requirements, other than Sec. Sec.  
23.302(a) through (a)(1) as discussed below. As discussed, supra 
note 201, the Commission recognizes that it recently issued proposed 
rulemakings regarding non-U.S. DCOs, and may modify this exception 
for exchange-traded and cleared swaps as necessary, based on any 
DCO-related proposed rules that are adopted by the Commission.

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[[Page 983]]

    With respect to the group B trade confirmation requirement, the 
Commission notes that where a cleared swap is executed anonymously on a 
DCM or SEF (as discussed above), independent requirements that apply to 
DCM and SEF transactions pursuant to the Commission's regulations 
should ensure that these requirements are met.\316\ And, for a 
combination of reasons, including the fact that a registered FBOT is 
analogous to a DCM and is expected to be subject to comprehensive 
supervision and regulation in its home country,\317\ and the fact that 
the swap will be cleared, the Commission believes that the Commission's 
trade confirmation requirements should not apply to foreign-based swaps 
that meet the requirements of the exception and are traded on 
registered FBOTs.
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    \316\ See 17 CFR 23.501(a)(4)(i) (``Any swap transaction 
executed on a swap execution facility or designated contract market 
shall be deemed to satisfy the requirements of this section, 
provided that the rules of the swap execution facility or designated 
contract market establish that confirmation of all terms of the 
transactions shall take place at the same time as execution.''); and 
37.6(b) (``A swap execution facility shall provide each counterparty 
to a transaction that is entered on or pursuant to the rules of the 
swap execution facility with a written record of all of the terms of 
the transaction which shall legally supersede any previous agreement 
and serve as confirmation of the transaction. The confirmation of 
all terms shall take place at the same time as execution . . .'').
    \317\ Pursuant to 17 CFR 48.5(d)(2), in reviewing the 
registration application of an FBOT, the Commission will consider 
whether the FBOT and its clearing organization are subject to 
comprehensive supervision and regulation by the appropriate 
governmental authorities in their home country or countries that is 
comparable to the comprehensive supervision and regulation to which 
DCMs and DCOs are respectively subject under the Act, Commission 
regulations, and other applicable United States laws and 
regulations.
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    Of the remaining group B requirements, the portfolio reconciliation 
and compression and swap trading relationship documentation 
requirements would not apply to cleared DCM, SEF, or FBOT transactions 
described above because the Commission regulations that establish those 
requirements make clear that they do not apply to cleared 
transactions.\318\ For the last group B requirement--the daily trading 
records requirement \319\--the Commission believes that, as a matter of 
international comity and recognizing the supervisory interests of 
foreign regulators who may have their own trading records requirements, 
it is appropriate to except such foreign-based swaps from certain of 
the Commission's daily trading records requirements. However, the 
Commission believes that the requirements of Sec. Sec.  23.202(a) 
through (a)(1) should continue to apply, as it believes that all swap 
entities should be required to maintain, among other things, sufficient 
records to conduct a comprehensive and accurate trade reconstruction 
for each swap. The Commission notes that, in particular, for certain 
pre-execution trade information under Sec.  23.202(a)(1),\320\ the swap 
entity may be the best, or only, source for such records. For this 
reason, paragraphs (a) through (a)(1) of Sec.  23.202 are carved out 
from the group B requirements in the proposed exception.
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    \318\ See 17 CFR 23.502(d) (``Nothing in this section [portfolio 
reconciliation] shall apply to a swap that is cleared by a 
derivatives clearing organization''); 23.503(c) (``Nothing in this 
section [portfolio compression] shall apply to a swap that is 
cleared by a derivatives clearing organization.''); and 
23.504(a)(1)(iii) (``The requirements of this section [swap trading 
relationship documentation] shall not apply to . . . [s]waps cleared 
by a derivatives clearing organization.'').
    \319\ See 17 CFR 23.202.
    \320\ See 17 CFR 23.202(a)(1).
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    Additionally, given that this exception is predicated on anonymity, 
many of the group C requirements would be inapplicable.\321\ In the 
interest of international comity and because the proposed exception 
requires that the swap be exchange-traded and cleared, the Commission 
is proposing that foreign-based swaps also be excepted from the 
remaining group C requirements in these circumstances. The Commission 
expects that the requirements that the swaps be exchange-traded and 
cleared will generally limit swaps that benefit from the exception to 
standardized and commonly-traded, foreign-based swaps, for which the 
Commission believes application of the remaining group C requirements 
is not necessary.
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    \321\ See 17 CFR 23.402(b)-(c) (requiring SDs and MSPs to obtain 
and retain certain information only about each counterparty ``whose 
identity is known to the SD or MSP prior to the execution of the 
transaction''); 23.430(e) (not requiring SDs and MSPs to verify 
counterparty eligibility when a transaction is entered on a DCM or 
SEF and the SD or MSP does not know the identity of the counterparty 
prior to execution); 23.431(c) (not requiring disclosure of material 
information about a swap if initiated on a DCM or SEF and the SD or 
MSP does not know the identity of the counterparty prior to 
execution); 23.450(h) (not requiring SDs and MSPs to have a 
reasonable basis to believe that a Special Entity has a qualified, 
independent representative if the transaction with the Special 
Entity is initiated on a DCM or SEF and the SD or MSP does not know 
the identity of the Special Entity prior to execution); and 
23.451(b)(2)(iii) (disapplying the prohibition on entering into 
swaps with a governmental Special Entity within two years after any 
contribution to an official of such governmental Special Entity if 
the swap is initiated on a DCM or SEF and the SD or MSP does not 
know the identity of the Special Entity prior to execution). Because 
the Commission believes a registered FBOT is analogous to a DCM for 
these purposes and is expected to be subject to comprehensive 
supervision and regulation in its home country, and because a SEF 
that is exempted from registration by the Commission pursuant to 
section 5h(g) of the CEA must be subject to supervision and 
regulation that is comparable to that to which Commission-registered 
SEFs are subject, the Commission is also proposing that these group 
C requirements would not be applicable where such a swap is executed 
anonymously on a registered FBOT, or a SEF that has been exempted 
from registration with the Commission pursuant to section 5h(g) of 
the CEA, and cleared.
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2. Foreign Swap Group C Exception
    The Commission is also proposing that each non-U.S. swap entity and 
foreign branch of a U.S. swap entity would be excepted from the group C 
requirements with respect to its foreign-based swaps with a foreign 
counterparty.\322\ Such swaps would not include as a party a U.S. 
person (other than a foreign branch where the swap is conducted through 
such foreign branch) or be conducted through a U.S. branch. Given that 
the group C requirements are intended to promote counterparty 
protections in the context of local market sales practices, the 
Commission recognizes that foreign regulators may have a relatively 
stronger supervisory interest in regulating such swaps in relation to 
the group C requirements. Accordingly, the Commission believes that 
applying the group C requirements to these transactions may not be 
warranted.\323\
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    \322\ Proposed Sec.  23.23(e)(1)(ii) This approach is similar to 
the Guidance. See Guidance, 78 FR at 45360-61. As discussed in 
section II.G, under the Proposed Rule, a foreign counterparty would 
mean: (1) A non-U.S. person, except with respect to a swap conducted 
through a U.S. branch of that non-U.S. person; or (2) a foreign 
branch where it enters into a swap in a manner that satisfies the 
definition of a swap conducted through a foreign branch.
    As used herein, the term swap includes transactions in swaps as 
well as swaps that are offered but not entered into, as applicable.
    \323\ The Commission expressed a similar view in the Guidance. 
See Guidance, 78 FR at 45360-61.
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    The Commission notes that, just as the Commission has a strong 
supervisory interest in regulating and enforcing the group C 
requirements associated with swaps taking place in the United States, 
foreign regulators would have a similar interest in overseeing sales 
practices for swaps occurring within their jurisdictions. Further, 
given the scope of section 2(i) of the CEA with respect to the 
Commission's regulation of swap activities outside the United States, 
the Commission believes that imposing its group C requirements on a 
foreign-based swap between a non-U.S. swap entity or foreign branch of 
a U.S. swap entity, on

[[Page 984]]

one hand, and a foreign counterparty, on the other, is generally not 
necessary to advance the customer protection goals of the Dodd-Frank 
Act embodied in the group C requirements.
    On the other hand, whenever a swap involves at least one party that 
is a U.S. person (other than a foreign branch where the swap is 
conducted through such foreign branch) or is a swap that is conducted 
through a U.S. branch, the Commission believes it has a strong 
supervisory interest in regulating and enforcing the group C 
requirements. A major purpose of Title VII is to control the potential 
harm to U.S. markets that can arise from risks that are magnified or 
transferred between parties via swaps. Exercise of U.S. jurisdiction 
with respect to the group C requirements over such swaps is a 
reasonable exercise of jurisdiction because of the strong U.S. interest 
in minimizing the potential risks that may flow to the U.S. economy as 
a result of such swaps.\324\
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    \324\ See supra section I.C.2.
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3. Non-U.S. Swap Entity Group B Exception
    The Commission is also proposing that each non-U.S. swap entity 
that is an Other Non-U.S. Person would be excepted from the group B 
requirements with respect to any foreign-based swap with a foreign 
counterparty that is also an Other Non-U.S. Person.\325\ In these 
circumstances, where no party to the foreign-based swap is a U.S. 
person, guaranteed by a U.S. person, or an SRS, and, the particular 
swap is a foreign-based swap, notwithstanding that one or both parties 
to such swap may be a swap entity, the Commission believes that foreign 
regulators may have a relatively stronger supervisory interest in 
regulating such swaps with respect to the subject matter covered by the 
group B requirements, and that, in the interest of international 
comity, applying the group B requirements to these foreign-based swaps 
is not warranted.\326\
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    \325\ Proposed Sec.  23.23(e)(2). This approach is similar to 
the Guidance; however, the Commission notes that the Proposed Rule 
limits the non-U.S. swap entities eligible for this exception to 
those that are Other Non-U.S. Persons, and the Guidance did not 
contain a similar limitation. See Guidance, 78 FR at 45352-53.
    \326\ The Commission notes that, generally, it would expect swap 
entities that rely on this exception to be subject to risk 
mitigation standards in the foreign jurisdictions in which they 
reside similar to those included in the Group B Requirements, as 
most jurisdictions surveyed by the FSB in respect of their swaps 
trading have implemented such standards. See 2019 FSB Progress 
Report, Table M.
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4. Foreign Branch Group B Exception
    The Commission is also proposing that each foreign branch of a U.S. 
swap entity would be excepted from the group B requirements, with 
respect to any foreign-based swap with a foreign counterparty that is 
an Other Non-U.S. Person, subject to certain limitations.\327\ 
Specifically, (1) the exception would not be available with respect to 
any group B requirement for which substituted compliance (discussed in 
section VI.C below) is available for the relevant swap; and (2) in any 
calendar quarter, the aggregate gross notional amount of swaps 
conducted by a swap entity in reliance on the exception may not exceed 
five percent of the aggregate gross notional amount of all its swaps in 
that calendar quarter.\328\
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    \327\ Proposed Sec.  23.23(e)(3). This is similar to a limited 
exception for transactions by foreign branches in certain specified 
jurisdictions in the Guidance. See Guidance, 78 FR at 45351.
    \328\ Proposed Sec.  23.23(e)(3)(i) and (ii). For example, if a 
swap entity were to enter into $10 billion in aggregate gross 
notional of swaps in a calendar quarter, no more than $500 million 
in aggregate gross notional of such swaps would be eligible for the 
Foreign Branch Group B Exception.
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    The Commission is proposing the Foreign Branch Group B Exception to 
allow the foreign branches of U.S. swap entities to continue to access 
swap markets for which substituted compliance may not be available 
under limited circumstances.\329\ The Commission believes the Foreign 
Branch Group B Exception is appropriate because U.S. swap entities' 
activities through foreign branches in these markets, though not 
significant in volume in many cases, may nevertheless be an integral 
element of a U.S. swap entity's global business. Additionally, although 
not the Commission's main purpose, the Commission endeavors to preserve 
liquidity in the emerging markets in which it expects this exception to 
be utilized, which may further encourage the global use and development 
of swap markets. Further, because of the proposed five percent cap on 
the use of the exception, the Commission preliminarily believes that 
the swap activity that would be excepted from the group B requirements 
would not raise significant supervisory concerns.
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    \329\ As noted above, where substituted compliance is available 
for a particular group B requirement and swap, the proposed 
exception would not be available. Proposed Sec.  23.23(e)(3)(i).
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5. Request for Comment
    The Commission invites comment on all aspects of the Proposed Rule, 
including each of the proposed exceptions discussed above, and 
specifically requests comments on the following questions. Please 
explain your responses and provide alternatives to the relevant 
portions of the Proposed Rule, where applicable.
    (29) In light of the Commission's supervisory interests, are the 
proposed exceptions appropriate? Should they be broadened or narrowed? 
For example, should the Exchange-Traded Exception be available to swaps 
other than foreign-based swaps? Should U.S. swap entities (other than 
their foreign branches) be eligible for any of the exceptions and under 
what circumstances? Should there be further limitations on the types of 
exchanges on which swaps eligible for the Exchange-Traded Exception may 
occur? With respect to foreign-based swaps with foreign branches, 
should the Foreign Swap Group C Exception be limited to swaps with 
foreign branches of a swap entity? Should the Non-U.S. Swap Entity 
Group B Exception and/or Foreign Branch Group B Exception be expanded 
to apply to foreign-based swaps with foreign counterparties that are 
foreign branches and/or to SRSs that are commercial entities? Should 
the Commission increase, decrease, or otherwise change the cap under 
the Foreign Branch Group B Exception?
    (30) With respect to the Non-U.S. Swap Entity Group B Exception, 
the Commission considered as an alternative allowing for substituted 
compliance for swaps that would be eligible for the exception. Would 
allowing for substituted compliance in these circumstances be a better 
approach than providing the Non-U.S. Swap Entity Group B Exception?

C. Substituted Compliance

    Substituted compliance is a fundamental component of the 
Commission's cross-border framework.\330\ It is intended to promote the 
benefits of integrated global markets by reducing the degree to which 
market participants will be subject to duplicative regulations. 
Substituted compliance also fosters international harmonization by 
encouraging U.S. and foreign regulators to seek to adopt consistent and 
comparable regulatory regimes that can result in deference to each 
other's regime.\331\ When properly

[[Page 985]]

calibrated, substituted compliance promotes open, transparent, and 
competitive markets without compromising market integrity. On the other 
hand, when construed too broadly, substituted compliance could defer 
important regulatory interests to foreign regulators that have not 
implemented comparably robust regulatory frameworks.
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    \330\ For example, in addition to the Guidance, the Commission 
has provided substituted compliance with respect to foreign futures 
and options transactions (see, e.g., Foreign Futures and Options 
Transactions, 67 FR 30785 (May 8, 2002); Foreign Futures and Options 
Transactions, 71 FR 6759 (Feb. 9, 2006)) and margin for uncleared 
swaps (see Cross-Border Margin Rule, 81 FR 34818).
    \331\ Substituted compliance, therefore, also is consistent with 
the directive of Congress in the Dodd-Frank Act that the Commission 
``coordinate with foreign regulatory authorities on the 
establishment of consistent international standards with respect to 
the regulation'' of swaps and swap entities. See Dodd-Frank Act, 
Public Law 111-203 section 752(a); 15 U.S.C. 8325.
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    The Commission believes that in order to achieve the important 
policy goals of the Dodd-Frank Act, all U.S. swap entities must be 
fully subject to the Dodd-Frank Act requirements addressed by the 
Proposed Rule, without regard to whether their counterparty is a U.S. 
or non-U.S. person.\332\ Given that such firms conduct their business 
within the United States, their activities inherently have a direct and 
significant connection with activities in, or effect on, U.S. commerce. 
However, the Commission recognizes that, in certain circumstances, non-
U.S. swap entities' activities with non-U.S. persons may have a more 
attenuated nexus to U.S. commerce. Further, the Commission acknowledges 
that foreign jurisdictions also have a supervisory interest in such 
activity. The Commission therefore believes that substituted compliance 
may be appropriate for non-U.S. swap entities and foreign branches of 
U.S. swap entities in certain circumstances.
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    \332\ As further explained below, the Commission is proposing 
limited substituted compliance for swaps conducted through a foreign 
branch with foreign counterparties.
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    In light of the interconnectedness of the global swap market and 
consistent with CEA section 2(i) and international comity, the 
Commission is proposing a substituted compliance regime with respect to 
the group A and group B requirements that builds upon the Commission's 
current substituted compliance framework and aims to promote diverse 
markets without compromising the central tenets of the Dodd-Frank Act. 
As discussed below, the Proposed Rule outlines the circumstances in 
which a non-U.S. swap entity or foreign branch of a U.S. swap entity 
would be permitted to comply with the group A and/or group B 
requirements by complying with comparable standards in its home 
jurisdiction.
1. Proposed Substituted Compliance Framework for the Group A 
Requirements
    The group A requirements, which relate to compliance programs, risk 
management, and swap data recordkeeping, are generally implemented on a 
firm-wide basis in order to effectively address enterprise risk. 
Accordingly, it is not practical to limit substituted compliance for 
the group A requirements to only those transactions involving non-U.S. 
persons. Further, the Commission recognizes that foreign regulators 
maintain the primary relationships with, and may have the strongest 
supervisory interests over, non-U.S. swap entities. Therefore, given 
that the group A requirements cannot be effectively applied on a 
fragmented jurisdictional basis, and in furtherance of international 
comity, the Commission is proposing to permit a non-U.S. swap entity to 
avail itself of substituted compliance with respect to the group A 
requirements where the non-U.S swap entity is subject to comparable 
regulation in its home jurisdiction.\333\
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    \333\ Proposed Sec.  23.23(f)(1). This approach is consistent 
with the Guidance. See Guidance, 78 FR at 45338.
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2. Proposed Substituted Compliance Framework for the Group B 
Requirements
    Unlike the group A requirements, the group B requirements, which 
relate to counterparty relationship documentation, portfolio 
reconciliation and compression, trade confirmation, and daily trading 
records, are more closely tied to local market conventions and can be 
effectively implemented on a transaction-by-transaction or relationship 
basis. It is therefore practicable to allow substituted compliance for 
group B requirements for transactions with non-U.S. persons. The 
Commission also recognizes that foreign regulators may have strong 
supervisory interests in transactions that take place in their 
jurisdiction. Accordingly, the Commission is proposing to permit a non-
U.S. swap entity or foreign branch of a U.S. swap entity to avail 
itself of substituted compliance for the group B requirements in 
certain circumstances, depending on the nature of its counterparty.
    As discussed above, the Commission believes that swaps involving 
U.S. persons are one of the types of swaps that have a direct and 
significant connection with activities in, or effect on, U.S. commerce. 
Accordingly, the Proposed Rule would generally not permit substituted 
compliance for the group B requirements for swaps where one of the 
counterparties is a U.S. person.\334\ However, the Commission 
recognizes that substituted compliance may be appropriate in certain 
circumstances for foreign branches of U.S. swap entities. Although 
foreign branches are fully integrated within U.S. persons, they 
generally enter into foreign-based swaps. In such cases, the Commission 
believes it may not be appropriate to impose strict adherence to the 
Commission's group B requirements, which are tailored to U.S. market 
practices. The Commission acknowledges that requiring foreign branches 
of U.S. swap entities to comply with U.S.-based requirements in non-
U.S. markets may place them at a competitive disadvantage.
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    \334\ As further explained below, the Commission is proposing a 
limited exception for swaps conducted through a foreign branch with 
foreign counterparties.
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    Given that group B requirements can be effectively applied on a 
transaction-by-transaction basis, and the Commission's interest in 
promoting international comity and market liquidity, the Commission is 
proposing to allow a non-U.S. swap entity (unless transacting though a 
U.S. branch), or a U.S. swap entity transacting through a foreign 
branch, to avail itself of substituted compliance with respect to the 
group B requirements for swaps with foreign counterparties.\335\
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    \335\ Proposed Sec.  23.23(f)(2). This approach is consistent 
with the Guidance. The Commission is proposing to limit the 
availability of substituted compliance to swaps conducted through a 
foreign branch of a U.S. swap entity as an anti-evasion measure to 
prevent U.S. swap entities from simply booking trades in a foreign 
branch to avoid the group B requirements.
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3. Request for Comment
    The Commission invites comment on all aspects of the Proposed Rule, 
including its proposed approach to substituted compliance for the group 
A and group B requirements, and specifically requests comments on the 
following questions. Please explain your responses and provide 
alternatives to the relevant portions of the Proposed Rule, where 
applicable.
    (31) Should the Commission continue to treat group A requirements 
differently than group B requirements for purposes of substituted 
compliance? Should the Commission adopt a universal entity-wide or 
transaction-by-transaction approach?
    (32) Should the Commission expand or narrow the availability of 
substituted compliance for swaps involving U.S. persons?
    (33) Is it practicable for non-U.S. swap entities to utilize 
substituted compliance for transactions with non-U.S. persons? \336\
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    \336\ The Commission notes that while the Guidance stated that 
all swap entities (wherever located) are subject to all of the 
CFTC's Title VII requirements, the Guidance went on to describe how 
and when the Commission would expect swap entities to comply with 
specific ELRs and TLRs, and when substituted compliance would be 
available.

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[[Page 986]]

    (34) Given that the Guidance did not apply the group B requirements 
to swaps between certain non-U.S. persons, should the Commission 
consider a phase-in period for the application of the group B 
requirements for swaps between SDs that are Guaranteed Entities or SRSs 
with counterparties that are Other Non-U.S. Persons where substituted 
compliance is not currently available?
    (35) To what extent do foreign branches of U.S. swap entities enter 
into swaps with U.S. persons or affiliates of U.S. persons?
    (36) Should the Commission treat foreign branches differently than 
the rest of the U.S. swap entity for purposes of substituted 
compliance?
    (37) How did/does the approach to substituted compliance in the 
Guidance positively and negatively impact market practices? Please 
provide any data in support of your comment.

D. Comparability Determinations

    The Commission is proposing to implement a process pursuant to 
which it would, in connection with certain requirements addressed by 
the Proposed Rule, conduct comparability determinations regarding a 
foreign jurisdiction's regulation of swap entities. The proposed 
approach builds upon the Commission's existing substituted compliance 
regime and aims to promote international comity and market liquidity 
without compromising the Commission's interests in reducing systemic 
risk, increasing market transparency, enhancing market integrity, and 
promoting counterparty protections. Specifically, the Proposed Rule 
outlines procedures for initiating comparability determinations, 
including eligibility and submission requirements, with respect to 
certain requirements addressed by the Proposed Rule. The Proposed Rule 
would establish a standard of review that the Commission would apply to 
such comparability determinations that emphasizes a holistic, outcomes-
based approach. The Proposed Rule, if adopted, is not intended to have 
any impact on the effectiveness of any existing Commission 
comparability determinations that were issued consistent with the 
Guidance, which would remain effective pursuant to their terms.\337\
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    \337\ See, e.g., Comparability Determination for Australia: 
Certain Entity-Level Requirements, 78 FR 78864 (Dec. 27, 2013); 
Comparability Determination for Canada: Certain Entity-Level 
Requirements, 78 FR 78839 (Dec. 27, 2013); Comparability 
Determination for the European Union: Certain Entity-Level 
Requirements, 78 FR 78923 (Dec. 27, 2013); Comparability 
Determination for Hong Kong: Certain Entity-Level Requirements, 78 
FR 78852 (Dec. 27, 2013); Comparability Determination for Japan: 
Certain Entity-Level Requirements, 78 FR 78910 (Dec. 27, 2013); 
Comparability Determination for Switzerland: Certain Entity-Level 
Requirements, 78 FR 78899 (Dec. 27, 2013); Comparability 
Determination for the European Union: Certain Transaction-Level 
Requirements, 78 FR 78878 (Dec. 27, 2013); and Comparability 
Determination for Japan: Certain Transaction-Level Requirements, 78 
FR 78890 (Dec. 27, 2013).
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    As discussed above, the Commission is proposing to permit a non-
U.S. swap entity or foreign branch of a U.S. swap entity to comply with 
a foreign jurisdiction's swap standards in lieu of the Commission's 
corresponding requirements in certain cases, provided that the 
Commission determines that such foreign standards are comparable to the 
Commission's requirements. All swap entities, regardless of whether 
they rely on such a comparability determination, would remain subject 
to the Commission's examination and enforcement authority.\338\ 
Accordingly, if a swap entity fails to comply with a foreign 
jurisdiction's relevant standards, or the terms of the applicable 
comparability determination, the Commission could initiate an action 
for a violation of the Commission's corresponding requirements.
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    \338\ Proposed Sec.  23.23(g)(5). The Commission notes that the 
National Futures Association (``NFA'') has certain delegated 
authority with respect to SDs and MSPs. Additionally, all registered 
SDs and MSPs are required to be members of the NFA and are subject 
to examination by the NFA.
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1. Standard of Review
    The Commission is proposing to establish a standard of review 
pursuant to which the Commission would determine whether a foreign 
jurisdiction's regulatory standards are comparable to the group A and 
group B requirements. The Commission is proposing a flexible outcomes-
based approach that emphasizes comparable regulatory outcomes over 
identical regulatory approaches.\339\ The Commission has published 
numerous comparability determinations consistent with the Guidance and 
pursuant to the Cross-Border Margin Rule.\340\ In doing so, the 
Commission has developed a deeper understanding of the nuances in 
comparing foreign jurisdictions' regulatory approaches with that of the 
Commission. Specifically, the Commission has identified several 
circumstances in which a foreign jurisdiction may achieve comparable 
regulatory outcomes to those of the CFTC, notwithstanding certain 
differences in regulatory or supervisory structures. For example, in 
certain jurisdictions, the Commission has found comparability with 
respect to certain Commission requirements based on a combination of 
robust prudential supervision coupled with supervisory guidelines to 
achieve comparable regulatory outcomes as the Commission 
requirements.\341\ Therefore, the Commission believes it is necessary 
to adopt a flexible approach to substituted compliance that would 
enable it to address a broad range of regulatory approaches.
---------------------------------------------------------------------------

    \339\ This is similar to the Commission's approach in the 
Guidance (see Guidance, 78 FR at 45342-43) and the Cross-Border 
Margin Rule (see Cross-Border Margin Rule, 81 FR at 34846).
    \340\ See e.g., supra notes 142 and 337.
    \341\ See, e.g., Comparability Determination for Canada: Certain 
Entity-Level Requirements, 78 FR 78839 (Dec. 27, 2013); Amendment to 
Comparability Determination for Japan: Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 
12074 (Apr. 1, 2019).
---------------------------------------------------------------------------

    While the Commission has historically taken a similar outcomes-
based approach to comparability determinations, the Proposed Rule would 
allow the Commission to take an even more holistic view of a foreign 
jurisdiction's regulatory regime. Specifically, the Proposed Rule would 
allow the Commission to consider all relevant elements of a foreign 
jurisdiction's regulatory regime, thereby allowing the Commission to 
tailor its assessment to a broad range of foreign regulatory 
approaches.\342\ Accordingly, pursuant to the Proposed Rule, a foreign 
jurisdiction's regulatory regime would not need to be identical to the 
relevant Commission requirements, so long as both regulatory frameworks 
are comparable in terms of holistic outcome. Under the Proposed Rule, 
in assessing comparability, the Commission may consider any factor it 
deems appropriate, which may include: (1) The scope and objectives of 
the relevant foreign jurisdiction's regulatory standards; (2) whether, 
despite differences, a foreign jurisdiction's regulatory standards 
achieve comparable regulatory outcomes to the Commission's 
corresponding requirements; (3) the ability of the relevant regulatory 
authority or authorities to supervise and enforce compliance with the 
relevant foreign jurisdiction's regulatory standards; and (4) whether 
the relevant foreign

[[Page 987]]

jurisdiction's regulatory authorities have entered into a memorandum of 
understanding or similar cooperative arrangement with the Commission 
regarding the oversight of swap entities.\343\ The Proposed Rule would 
also enable the Commission to consider other relevant factors, 
including whether a foreign regulatory authority has issued a 
reciprocal comparability determination with respect to the Commission's 
corresponding regulatory requirements. Further, given that some foreign 
jurisdictions may implement prudential supervisory guidelines in the 
regulation of swaps, the Proposed Rule would allow the Commission to 
base comparability on a foreign jurisdiction's regulatory standards, 
rather than regulatory requirements.
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    \342\ Under the Proposed Rule, the Commission would consider all 
relevant elements of a foreign jurisdiction's regulatory regime; 
however, the fact that a foreign regulatory regime may not address 
one of more of such elements would not preclude a finding of 
comparability by the Commission. Also, in making a comparability 
determination, the Commission would have the flexibility to weigh 
more heavily elements it deems to be more critical than others and 
less heavily those that it deems to be less critical.
    \343\ Proposed Sec.  23.23(g)(4).
---------------------------------------------------------------------------

    Although, when assessed against the relevant Commission 
requirements, the Commission may find comparability with respect to 
some, but not all, of a foreign jurisdiction's regulatory standards, it 
may also make a holistic finding of comparability that considers the 
broader context of a foreign jurisdiction's related regulatory 
standards. Accordingly, under the Proposed Rule, a comparability 
determination need not contain a standalone assessment of comparability 
for each relevant regulatory requirement, so long as it clearly 
indicates the scope of regulatory requirements that are covered by the 
determination. Further, the Commission may impose any terms and 
conditions on a comparability determination that it deems 
appropriate.\344\
---------------------------------------------------------------------------

    \344\ Proposed Sec.  23.23(g)(6).
---------------------------------------------------------------------------

2. Eligibility Requirements
    Under the Proposed Rule, the Commission could undertake a 
comparability determination on its own initiative in furtherance of 
international comity.\345\ In such cases, the Commission expects that 
it would nonetheless engage with the relevant foreign regulator and/or 
regulated entities to develop a fulsome understanding of the relevant 
foreign regulatory regime. Alternatively, certain outside parties would 
also be eligible to request a comparability determination from the 
Commission with respect to some or all of the group A and group B 
requirements. Under the Proposed Rule, a comparability determination 
could be requested by: (1) Swap entities that are eligible for 
substituted compliance; (2) trade associations whose members are such 
swap entities; or (3) foreign regulatory authorities that have direct 
supervisory authority over such swap entities and are responsible for 
administering the relevant swap standards in the foreign 
jurisdiction.\346\
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    \345\ Proposed Sec.  23.23(g)(1).
    \346\ Proposed Sec.  23.23(g)(2).
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3. Submission Requirements
    In connection with a comparability determination with respect to 
some or all of the group A and group B requirements, applicants would 
be required to furnish certain information to the Commission that 
provides a comprehensive understanding of the foreign jurisdiction's 
relevant swap standards, including how they might differ from the 
corresponding requirements in the CEA and Commission regulations.\347\ 
Further, applicants would be expected to provide an explanation as to 
how any such differences may nonetheless achieve comparable outcomes to 
the Commission's attendant regulatory requirements.\348\
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    \347\ Proposed Sec.  23.23(g)(3).
    \348\ Proposed Sec.  23.23(g)(3)(iii).
---------------------------------------------------------------------------

4. Request for Comment
    The Commission invites comment on all aspects of the Proposed Rule, 
including its proposed approach to comparability determinations, and 
specifically requests comments on the following questions. Please 
explain your responses and provide alternatives to the relevant 
portions of the Proposed Rule, where applicable.
    (38) Please provide comments regarding the Commission's proposal 
regarding its standard of review for comparability determinations. 
Should the Commission limit the factors it may consider when issuing a 
comparability determination?
    (39) Should comparability determinations contain an element-by-
element assessment of comparability?
    (40) How should the Commission address inconsistencies or conflicts 
between U.S. and non-U.S. regulatory standards?
    (41) How have the Commission's approaches to comparability 
determinations in the Guidance and the Cross-Border Margin rule 
positively and negatively impacted market practices? Please provide any 
data in support of your comment.

VII. Recordkeeping

    Under the Proposed Rule, a SD or MSP would be required to create a 
record of its compliance with all provisions of the Proposed Rule, and 
retain those records in accordance with Sec.  23.203.\349\ Registrants' 
records are a fundamental element of an entity's compliance program, as 
well as the Commission's oversight function. Accordingly, such records 
should be sufficiently detailed to allow compliance officers and 
regulators to assess compliance with the Proposed Rule.
---------------------------------------------------------------------------

    \349\ Proposed Sec.  23.23(h).
---------------------------------------------------------------------------

VIII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities.\350\ The 
Commission previously established definitions of ``small entities'' to 
be used in evaluating the impact of its regulations on small entities 
in accordance with the RFA.\351\ The Proposed Rule addresses when U.S. 
persons and non-U.S. persons would be required to include their cross-
border swap dealing transactions or swap positions in their SD or MSP 
registration threshold calculations, respectively,\352\ and the extent 
to which SDs or MSPs would be required to comply with certain of the 
Commission's regulations in connection with their cross-border swap 
transactions or swap positions.\353\
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    \350\ See 5 U.S.C. 601 et seq.
    \351\ See 47 FR 18618 (Apr. 30, 1982) (finding that DCMs, FCMs, 
commodity pool operators and large traders are not small entities 
for RFA purposes).
    \352\ Proposed Sec.  23.23(b)-(d).
    \353\ Proposed Sec.  23.23(e).
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    The Commission previously determined that SDs and MSPs are not 
small entities for purposes of the RFA.\354\ The Commission believes, 
based on its information about the swap market and its market 
participants, that: (1) The types of entities that may engage in more 
than a de minimis amount of swap dealing activity such that they would 
be required to register as an SD--which generally would be large 
financial institutions or other large entities--would not be ``small 
entities'' for purposes of the RFA, and (2) the types of entities that 
may have swap positions such that they would be required to register as 
an MSP would not be ``small entities'' for purposes of the RFA. Thus, 
to the extent such entities are large financial institutions or other 
large entities that would be required to register as SDs or MSPs with 
the Commission by virtue of their cross-

[[Page 988]]

border swap dealing transactions and swap positions, they would not be 
considered small entities.\355\
---------------------------------------------------------------------------

    \354\ See Entities Rule, 77 FR at 30701; Registration of Swap 
Dealers and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19, 
2012) (noting that like FCMs, SDs will be subject to minimum capital 
requirements, and are expected to be comprised of large firms, and 
that MSPs should not be considered to be small entities for 
essentially the same reasons that it previously had determined large 
traders not to be small entities).
    \355\ The SBA's Small Business Size Regulations, codified at 13 
CFR 121.201, identifies (through North American Industry 
Classification System codes) a small business size standard of $38.5 
million or less in annual receipts for Sector 52, Subsector 523--
Securities, Commodity Contracts, and Other Financial Investments and 
Related Activities. Entities that would be affected by the Proposed 
Rule are generally large financial institutions or other large 
entities that would be required to include their cross-border 
dealing transactions or swap positions toward the SD and MSP 
registration thresholds, respectively, as specified in the Proposed 
Rule.
---------------------------------------------------------------------------

    To the extent that there are any affected small entities under the 
Proposed Rule, they would need to assess how they are classified under 
the Proposed Rule (i.e., U.S. person, SRS, Guaranteed Entity, and Other 
Non-U.S. Person) and monitor their swap activities in order to 
determine whether they are required to register as an SD under the 
Proposed Rule. The Commission believes that, if the Proposed Rule is 
adopted, market participants would only incur incremental costs, which 
are expected to be small, in modifying their existing systems and 
policies and procedures resulting from changes to the status quo made 
by the Proposed Rule.\356\
---------------------------------------------------------------------------

    \356\ The Proposed Rule addresses the cross-border application 
of the registration and certain other regulations. The Proposed Rule 
would not change such regulations.
---------------------------------------------------------------------------

    Accordingly, for the foregoing reasons, the Commission finds that 
there will not be a substantial number of small entities impacted by 
the Proposed Rule. Therefore, the Chairman, on behalf of the 
Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the 
proposed regulations will not have a significant economic impact on a 
substantial number of small entities. The Commission invites comment on 
the impact of the Proposed Rule on small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \357\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. The Proposed Rule provides for the 
cross-border application of the SD and MSP registration thresholds and 
the group A, group B, and group C requirements.
---------------------------------------------------------------------------

    \357\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    Proposed Sec. Sec.  23.23(b) and (c), which address the cross-
border application of the SD and MSP registration thresholds, 
respectively, potentially could lead to non-U.S. persons that are 
currently not registered as SDs or MSPs to exceed the relevant 
registration thresholds, therefore requiring the non-U.S. persons to 
register as SDs or MSPs. However, the Commission preliminarily believes 
that, if adopted, the Proposed Rule will not result in any new 
registered SDs or MSPs or the deregistration of registered SDs,\358\ 
and therefore, it does not believe an amendment to any existing 
collection of information is necessary as a result of proposed 
Sec. Sec.  23.23(b) and (c). Specifically, the Commission does not 
believe the Proposed Rule, if adopted, would change the number of 
respondents under the existing collection of information, 
``Registration of Swap Dealers and Major Swap Participants,'' Office of 
Management and Budget (``OMB'') Control No. 3038-0072.
---------------------------------------------------------------------------

    \358\ There are not currently any registered MSPs.
---------------------------------------------------------------------------

    Similarly, proposed Sec.  23.23(h) contains collection of 
information requirements within the meaning of the PRA as it would 
require that swap entities create a record of their compliance with 
Sec.  23.23 and retain records in accordance with Sec.  23.203; 
however, the Commission believes that records suitable to demonstrate 
compliance are already required to be created and maintained under the 
collections related to the Commission's swap entity registration, group 
B, and group C requirements. Specifically, existing collections of 
information, ``Confirmation, Portfolio Reconciliation, and Portfolio 
Compression Requirements for Swap Dealers and Major Swap 
Participants,'' OMB Control No. 3038-0068; ``Registration of Swap 
Dealers and Major Swap Participants,'' OMB Control No. 3038-0072; 
``Swap Dealer and Major Swap Participant Conflicts of Interest and 
Business Conduct Standards with Counterparties,'' OMB Control No. 3038-
0079; ``Confirmation, Portfolio Reconciliation, Portfolio Compression, 
and Swap Trading Relationship Documentation Requirements for Swap 
Dealers and Major Swap Participants,'' OMB Control No. 3038-0083; 
``Reporting, Recordkeeping, and Daily Trading Records Requirements for 
Swap Dealers and Major Participants,'' OMB Control No. 3038-0087; and 
``Confirmation, Portfolio Reconciliation, Portfolio Compression, and 
Swap Trading Relationship Documentation Requirements for Swap Dealers 
and Major Swap Participants,'' OMB Control No. 3038-0088 relate to 
these requirements.\359\ Accordingly, the Commission is not submitting 
to OMB an information collection request to create a new information 
collection in relation to proposed Sec.  23.23(h).
---------------------------------------------------------------------------

    \359\ To the extent a swap entity avails itself of an exception 
from a group B or group C requirement under the Proposed Rule and, 
thus, is no longer required to comply with the relevant group B and/
or group C requirements and related paperwork burdens, the 
Commission expects the paperwork burden related to that exception 
would be less than that of the corresponding requirement(s). 
However, in an effort to be conservative, because the Commission 
does not know how many swap entities will choose to avail themselves 
of the exceptions and for how many foreign-based swaps, the 
Commission is not changing the burden of its related collections to 
reflect the availability of such exceptions.
---------------------------------------------------------------------------

    Proposed Sec.  23.23(g) would result in collection of information 
requirements within the meaning of the PRA, as discussed below. The 
Proposed Rule contains collections of information for which the 
Commission has not previously received control numbers from the Office 
of Management and Budget (``OMB''). If adopted, responses to this 
collection of information would be required to obtain or retain 
benefits. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number. The Commission has submitted to OMB 
an information collection request to create a new information 
collection under OMB control number 3038-0072 (Registration of Swap 
Dealers and Major Swap Participants) for the collections contained in 
the Proposed Rule.
    As discussed in section VI.C above, the Commission is proposing to 
permit a non-U.S. swap entity or foreign branch of a U.S. swap entity 
to comply with a foreign jurisdiction's swap standards in lieu of the 
Commission's corresponding group A and group B requirements in certain 
cases, provided that the Commission determines that such foreign 
standards are comparable to the Commission's requirements. Proposed 
Sec.  23.23(g) would implement a process pursuant to which the 
Commission would conduct these comparability determinations, including 
outlining procedures for initiating such determinations. As discussed 
in section VI.D above, a comparability determination could be requested 
by swap entities that are eligible for substituted compliance, their 
trade associations, and foreign regulatory authorities meeting certain 
requirements.\360\ Applicants seeking a comparability determination 
would be required to furnish certain information to the Commission that 
provides a comprehensive explanation of the foreign jurisdiction's 
relevant swap standards, including how they might

[[Page 989]]

differ from the corresponding requirements in the CEA and Commission 
regulations and how, notwithstanding such differences, the foreign 
jurisdiction's swap standards achieve comparable outcomes to those of 
the Commission.\361\ The information collection would be necessary for 
the Commission to consider whether the foreign jurisdiction's relevant 
swap standards are comparable to the Commission's requirements.
---------------------------------------------------------------------------

    \360\ Proposed Sec.  23.23(g)(2).
    \361\ Proposed Sec.  23.23(g)(3).
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    Though under the Proposed Rule many entities would be eligible to 
request a comparability determination,\362\ the Commission expects to 
receive far fewer requests because once a comparability determination 
is made for a jurisdiction it would apply for all entities or 
transactions in that jurisdiction to the extent provided in the 
Commission's determination. Further, the Commission has already issued 
comparability determinations under the Guidance for certain of the 
Commission's requirements for Australia, Canada, the European Union, 
Hong Kong, Japan, and Switzerland,\363\ and the effectiveness of those 
determinations would not be affected by the Proposed Rule. 
Nevertheless, in an effort to be conservative in its estimate for 
purposes of the PRA, the Commission estimates that, if the Proposed 
Rule is adopted, it will receive a request for a comparability 
determination in relation to five (5) jurisdictions per year. Further, 
based on the Commission's experience in issuing comparability 
determinations, the Commission estimates that each request would impose 
an average of 40 burden hours, for an aggregate estimated hour burden 
of 200 hours. Accordingly, the proposed changes would result in an 
increase to the current burden estimates of OMB control number 3038-
0072 by 5 in the number of submissions and 200 burden hours.
---------------------------------------------------------------------------

    \362\ Currently, there are approximately 107 swap entities 
provisionally registered with the Commission, many of which may be 
eligible to apply for a comparability determination as a non-U.S. 
swap entity or a foreign branch. Additionally, a trade association, 
whose members include swap entities, and certain foreign regulators 
may also apply for a comparability determination.
    \363\ See supra note 142 and 337.
---------------------------------------------------------------------------

    The frequency of responses and total new burden associated with OMB 
control number 3038-0072, in the aggregate, reflecting the new burden 
associated with all the amendments proposed by the rulemaking and 
current burden not affected by this rulemaking,\364\ is as follows:
---------------------------------------------------------------------------

    \364\ The numbers below reflect the current burden for two 
separate information collections that are not affected by this 
rulemaking.
---------------------------------------------------------------------------

    Estimated annual number of respondents: 770.
    Estimated aggregate annual burden hours per respondent: 1.13 hours.
    Estimated aggregate annual burden hours for all respondents: 872.
    Frequency of responses: As needed.
    Information Collection Comments. The Commission invites the public 
and other Federal agencies to comment on any aspect of the proposed 
information collection requirements discussed above, including, without 
limitation, the Commission's discussion of the estimated burden of the 
collection of information requirements in Sec.  23.23(h). Pursuant to 
44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: 
(1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have practical 
utility; (2) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (3) determine whether 
there are ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566, or by email at 
[email protected]. Please provide the Commission with a copy 
of submitted comments so that all comments can be summarized and 
addressed in the final rule preamble. Refer to the ADDRESSES section of 
this notice for comment submission instructions to the Commission. A 
copy of the supporting statements for the collection of information 
discussed above may be obtained by visiting RegInfo.gov. OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication of this document in the 
Federal Register. Therefore, a comment is best assured of having its 
full effect if OMB receives it within 30 days of publication.

C. Cost-Benefit Considerations

    As detailed above, the Commission is proposing rules that would 
define certain key terms for purposes of certain Dodd-Frank Act swap 
provisions and address the cross-border application of the SD and MSP 
registration thresholds and the Commission's group A, group B, and 
group C requirements.
    The baseline against which the costs and benefits of the Proposed 
Rule are considered is, in principle, current law: In other words, 
applicable Dodd-Frank Act swap provisions in the CEA and regulations 
promulgated by the Commission to date, as made applicable to cross-
border transactions by Congress in CEA section 2(i), in the absence of 
a Commission rule establishing more precisely the application of that 
provision in particular situations. However, in practice, use of this 
baseline poses important challenges, for a number of reasons.
    First, there are intrinsic difficulties in sorting out costs and 
benefits of the Proposed Rule from costs and benefits intrinsic to the 
application of Dodd-Frank Act requirements to cross-border transactions 
directly pursuant to section 2(i), given that statute sets forth 
general principles for the cross-border application of Dodd-Frank Act 
swap requirements but does not attempt to address particular business 
situations in detail.
    Second, the Guidance established a general, non-binding framework 
for the cross-border application of many substantive Dodd-Frank Act 
requirements. In doing so, the Guidance considered, among other 
factors, the regulatory objectives of the Dodd-Frank Act and principles 
of international comity. As is apparent from the text of the Proposed 
Rule and the discussion in this preamble, the Proposed Rule is in 
certain respects consistent with the Guidance. The Commission 
understands that, while the Guidance is non-binding, many market 
participants have developed policies and practices that take into 
account the views expressed therein. At the same time, some market 
participants may currently apply CEA section 2(i), the regulatory 
objectives of the Dodd-Frank Act, and principles of international 
comity in ways that vary from the Guidance, for example because of 
circumstances not contemplated by the general, non-binding framework in 
the Guidance.
    Third, in addition to the Guidance, the Commission has issued 
comparability determinations finding that certain provisions of the 
laws and regulations of other jurisdictions are comparable in outcome 
to certain requirements under the CEA and regulations thereunder.\365\ 
In general,

[[Page 990]]

under these determinations, a market participant that complies with the 
specified provisions of the other jurisdiction would also be deemed to 
be in compliance with Commission regulations, subject to certain 
conditions.\366\
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    \365\ See supra notes 142 and 337.
    \366\ See id.
---------------------------------------------------------------------------

    Fourth, the Commission staff has issued several interpretive and 
no-action letters that are relevant to cross-border issues.\367\ As 
with the Guidance, the Commission recognizes that many market 
participants have relied on these staff letters in framing their 
business practices.
---------------------------------------------------------------------------

    \367\ See, e.g., CFTC Letter No. 13-64, No-Action Relief: 
Certain Swaps by Non-U.S. Persons that are Not Guaranteed or Conduit 
Affiliates of a U.S. Person Not to be Considered in Calculating 
Aggregate Gross Notional Amount for Purposes of Swap Dealer De 
Minimis Exception (Oct. 17, 2013), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-64.pdf; ANE Staff Advisory; ANE No-Action Relief; and CFTC Staff 
Letter No. 18-13.
---------------------------------------------------------------------------

    Fifth, as noted above, the international regulatory landscape is 
far different now than it was when the Dodd-Frank Act was enacted in 
2010.\368\ Even in 2013, when the CFTC published the Guidance, very few 
jurisdictions had made significant progress in implementing the global 
swap reforms that were agreed to by the G20 leaders at the Pittsburgh 
G20 Summit. Today, however, as a result of cumulative implementation 
efforts by regulators throughout the world, significant and substantial 
progress has been made in the world's primary swap trading 
jurisdictions to implement the G20 commitments. For these reasons, the 
actual costs and benefits of the Proposed Rule that would be 
experienced by a particular market participant may vary depending on 
the jurisdictions in which the market participant is active and when 
the market participant took steps to comply with various legal 
requirements.
---------------------------------------------------------------------------

    \368\ See supra section I.B.
---------------------------------------------------------------------------

    Because of these complicating factors, as well as limitations on 
available information, the Commission believes that a direct comparison 
of the costs and benefits of the Proposed Rule with those of a 
hypothetical cross-border regime based directly on section 2(i)--while 
theoretically the ideal approach--is infeasible in practice. As a 
further complication, the Commission recognizes that the Proposed 
Rule's costs and benefits would exist, regardless of whether a market 
participant: (1) First realized some of those costs and benefits when 
it conformed its business practices to provisions of the Guidance or 
Commission staff action that would now become binding legal 
requirements under the Proposed Rule; (2) does so now for the first 
time; or (3) did so in stages as international requirements evolved.
    In light of these considerations, the Commission will consider 
costs and benefits by focusing primarily on two types of information 
and analysis.
    First, the Commission will compare the Proposed Rule with current 
business practice, on the understanding that many market participants 
are now conducting business taking into account the Guidance, 
applicable CFTC staff letters, and existing comparability 
determinations. This approach will, for example, compare expected costs 
and benefits of conducting business under the Proposed Rule with those 
of conducting business in conformance with analogous provisions of the 
Guidance. In effect, this inquiry will examine new costs and benefits 
that would result from the Proposed Rule for market participants that 
are currently following the relevant Dodd-Frank Act swap provisions and 
regulations thereunder, the Guidance, the comparability determinations, 
and applicable staff letters. This is referred to as ``Baseline A.''
    Second, to the extent feasible, the Commission will consider 
relevant information on costs and benefits that industry has incurred 
to date in complying with the Dodd-Frank Act in cross-border 
transactions of the type that would be affected by the Proposed Rule. 
In light of the overlap in the subjects addressed by the Guidance and 
the Proposed Rule, this will include consideration of costs and 
benefits that have been generated where market participants have chosen 
to conform their business practices to the Guidance in areas relevant 
to the Proposed Rule. This second form of inquiry is, to some extent, 
over inclusive in that it is likely to capture some costs and benefits 
that flow directly from Congress's enactment of section 2(i) of the CEA 
or that otherwise are not strictly attributable to the Proposed Rule. 
However, since a theoretically perfect baseline for consideration of 
costs and benefits does not appear feasible, this second form of 
inquiry will help ensure that costs and benefits of the Proposed Rules 
are considered as fully as possible. This is referred to as ``Baseline 
B.''
    The Commission invites comments regarding all aspects of the 
baselines applied in this consideration of costs and benefits. In 
particular, the Commission would like commenters to address any 
variances or different circumstances they have experienced that affect 
the baseline for those commenters. Please be as specific as possible 
and include quantitative information where available.
    The costs associated with the key elements of the Commission's 
proposed cross-border approach to the SD and MSP registration 
thresholds--requiring market participants to classify themselves as 
U.S. persons, Guaranteed Entities, or SRSs \369\ and to apply the rules 
accordingly--fall into a few categories. Market participants would 
incur costs determining which category of market participant they and 
their counterparties fall into (``assessment costs''), tracking their 
swap activities or positions to determine whether they should be 
included in their registration threshold calculations (``monitoring 
costs''), and, to the degree that their activities or positions exceed 
the relevant threshold, registering with the Commission as an SD or MSP 
(``registration costs'').
---------------------------------------------------------------------------

    \369\ Proposed Sec.  23.23(a).
---------------------------------------------------------------------------

    Entities required to register as SDs or MSPs as a result of the 
Proposed Rule would also incur costs associated with complying with the 
relevant Dodd-Frank Act requirements applicable to registrants, such as 
the capital (when promulgated), margin, and business conduct 
requirements (``programmatic costs'').\370\ While only new registrants 
would be assuming these programmatic costs for the first time, the 
obligations of entities that are already registered as SDs may also 
change in the future as an indirect consequence of the Proposed Rule.
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    \370\ The Commission's discussion of programmatic costs and 
registration costs does not address MSPs. No entities are currently 
registered as MSPs, and the Commission does not expect that this 
status quo would change as a result of the Proposed Rule being 
adopted given the general similarities between the Proposed Rule's 
approach to the MSP registration threshold calculations and the 
Guidance.
---------------------------------------------------------------------------

    In developing the Proposed Rule, the Commission took into account 
the potential for creating or accentuating competitive disparities 
between market participants, which could contribute to market 
deficiencies, including market fragmentation or decreased liquidity, as 
more fully discussed below. Notably, competitive disparities may arise 
between U.S.-based financial groups and non-U.S. based financial groups 
as a result of differences in how the SD and MSP registration 
thresholds apply to the various classifications of market participants. 
For instance, an SRS must count all dealing swaps toward its SD de 
minimis calculation. Therefore, SRSs would be more likely to trigger 
the SD registration threshold relative to Other Non-U.S. Persons, and 
may therefore be at a competitive disadvantage compared

[[Page 991]]

to Other Non-U.S. Persons when trading with non-U.S. persons, as non-
U.S. persons may prefer to trade with non-registrants in order to avoid 
application of the Dodd-Frank Act swap regime.\371\ On the other hand, 
the Commission notes that certain counterparties may prefer to enter 
into swaps with SDs and MSPs that are subject to the robust 
requirements of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \371\ Dodd-Frank Act swap requirements may impose significant 
direct costs on participants falling within the SD or MSP 
definitions that are not borne by other market participants, 
including costs related to capital and margin requirements and 
business conduct requirements. To the extent that foreign 
jurisdictions adopt comparable requirements, these costs would be 
mitigated.
---------------------------------------------------------------------------

    Other factors also create inherent challenges associated with 
attempting to assess costs and benefits of the Proposed Rule. To avoid 
the prospect of being regulated as an SD or MSP, or otherwise falling 
within the Dodd-Frank Act swap regime, some market participants may 
restructure their businesses or take other steps (e.g., limiting their 
counterparties to Other Non-U.S. Persons) to avoid exceeding the 
relevant registration thresholds. The degree of comparability between 
the approaches adopted by the Commission and foreign jurisdictions and 
the potential availability of substituted compliance, whereby a market 
participant may comply with certain Dodd-Frank Act SD or MSP 
requirements by complying with a comparable requirement of a foreign 
financial regulator, may also affect the competitive impact of the 
Proposed Rule. The Commission expects that such impacts would be 
mitigated as the Commission continues to work with foreign and domestic 
regulators to achieve international harmonization and cooperation.
    In the sections that follow, the Commission discusses the costs and 
benefits associated with the Proposed Rule.\372\ Section 1 begins by 
addressing the assessment costs associated with the Proposed Rule, 
which derive in part from the defined terms used in the Proposed Rule 
(e.g., the proposed definitions of ``U.S. person,'' ``significant risk 
subsidiary,'' and ``guarantee''). Sections 2 and 3 consider the costs 
and benefits associated with the Proposed Rule's determinations 
regarding how each classification of market participants apply to the 
SD and MSP registration thresholds, respectively. Sections 4, 5, and 6 
address the monitoring, registration, and programmatic costs associated 
with the proposed cross-border approach to the SD (and, as appropriate, 
MSP) registration thresholds, respectively. Section 7 addresses the 
costs and benefits associated with the Proposed Rule's exceptions from, 
and available substituted compliance for, the group A, group B, and 
group C requirements, as well as comparability determinations. Section 
8 addresses the costs associated with the Proposed Rule's recordkeeping 
requirements. Section 9 discusses the factors established in section 
15(a) of the CEA.
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    \372\ The Commission endeavors to assess the expected costs and 
benefits of proposed rules in quantitative terms where possible. 
Where estimation or quantification is not feasible, the Commission 
provides its discussion in qualitative terms. Given a general lack 
of relevant data, the Commission's analysis in the Proposed Rule is 
generally provided in qualitative terms.
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    The Commission invites comment regarding the nature and extent of 
any costs and benefits that could result from adoption of the Proposed 
Rule and, to the extent they can be quantified, monetary and other 
estimates thereof.
1. Assessment Costs
    As discussed above, in applying the proposed cross-border approach 
to the SD and MSP registration thresholds, market participants would be 
required to first classify themselves as a U.S. person, an SRS, a 
Guaranteed Entity, or an Other Non-U.S. Person.
    With respect to Baseline A, the Commission expects that the costs 
to affected market participants of assessing which classification they 
fall into would generally be small and incremental. In most cases, the 
Commission believes an entity will have performed an initial 
determination or assessment of its status under either the Cross-Border 
Margin Rule (which uses substantially similar definitions of ``U.S. 
person'' and ``guarantee'') or the Guidance (which interprets ``U.S. 
person'' in a manner that is similar but not identical to the proposed 
definition of ``U.S. person''). Additionally, the Proposed Rule would 
allow market participants to rely on representations from their 
counterparties with regard to their classifications.\373\ However, the 
Commission acknowledges that swap entities would have to modify their 
existing operations to accommodate the new concept of an SRS. 
Specifically, market participants would need to determine whether they 
or their counterparties qualify as SRSs. Further, in order to rely on 
certain exclusions outlined in the Proposed Rule, swap entities would 
need to obtain annual representations regarding a counterparty's status 
as an SRS.
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    \373\ The Commission believes that these assessment costs for 
the most part have already been incurred by potential SDs and MSPs 
as a result of adopting policies and procedures under the Guidance 
and Cross-Border Margin Rule (which had similar classifications), 
both of which permitted counterparty representations. See Guidance, 
78 FR at 45315; Cross-Border Margin Rule, 81 FR at 34827.
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    With respect to Baseline B, wherein only certain market 
participants would have previously determined their status under the 
similar, but not identical, Cross-Border Margin Rule (and not the 
Guidance), the Commission believes that their assessment costs would 
nonetheless be small as a result of the Proposed Rule's reliance on 
clear, objective definitions of the terms ``U.S. person,'' 
``substantial risk subsidiary,'' and ``guarantee.'' Further, with 
respect to the determination of whether a market participant falls 
within the ``significant risk subsidiary'' definition,\374\ the 
Commission believes that assessment costs would be small as the 
definition relies, in part, on a familiar consolidation test already 
used by affected market participants in preparing their financial 
statements under U.S. GAAP. Further, the Commission notes that only 
those market participants with an ultimate U.S. parent entity that has 
more than $50 billion in global consolidated assets and that do not 
fall into one of the exceptions in proposed Sec.  23.23(a)(12)(i) or 
(ii) would need to consider if they are an SRS.
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    \374\ The ``substantial risk subsidiary'' definition is 
discussed further in section II.C.
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    Additionally, the Proposed Rule relies on the definition of 
``guarantee'' provided in the Cross-Border Margin Rule, which is 
limited to arrangements in which one party to a swap has rights of 
recourse against a guarantor with respect to its counterparty's 
obligations under the swap.\375\ Although non-U.S. persons would need 
to know whether they are Guaranteed Entities with respect to the 
relevant swap on a swap-by-swap basis for purposes of the SD and MSP 
registration calculations, the Commission believes that this 
information would already be known by non-U.S. persons.\376\ 
Accordingly, with respect to both baselines, the Commission believes 
that the costs associated with assessing whether an entity or its 
counterparty is a Guaranteed Entity would be small and incremental.
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    \375\ See supra section II.B.
    \376\ Because a guarantee has a significant effect on pricing 
terms and on recourse in the event of a counterparty default, the 
Commission believes that the guarantee would already be in existence 
and that a non-U.S. person therefore would have knowledge of its 
existence before entering into a swap.

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[[Page 992]]

2. Cross-Border Application of the SD Registration Threshold
(i) U.S. Persons, Guaranteed Entities, and SRSs
    Under the Proposed Rule, a U.S. person would include all of its 
swap dealing transactions in its de minimis calculation, without 
exception.\377\ As discussed above, that would include any swap dealing 
transactions conducted through a U.S. person's foreign branch, as such 
swaps are directly attributed to, and therefore impact, the U.S. 
person. Given that this requirement mirrors the Guidance in this 
respect, the Commission believes that the Proposed Rule would have a 
minimal impact on the status quo with regard to the number of 
registered or potential U.S. SDs, as measured against Baseline A.\378\ 
With respect to Baseline B, all U.S. persons would have included all of 
their transactions in its de minimis calculation, even absent the 
Guidance, pursuant to paragraph (4) of the SD definition.\379\ However, 
the Commission acknowledges that, absent the Guidance, some U.S. 
persons may not have interpreted CEA section 2(i) to require them to 
include swap dealing transactions conducted through their foreign 
branches in their de minimis calculation. Accordingly, with respect to 
Baseline B, the Commission expects that some U.S. persons may incur 
some incremental costs as a result of having to count swaps conducted 
through their foreign branches.
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    \377\ Proposed Sec.  23.23(b)(1).
    \378\ The Commission is not estimating the number of new U.S. 
SDs, as the methodology for including swaps in a U.S. person's SD 
registration calculation does not diverge from the approach included 
in the Guidance (i.e., a U.S. person must include all of its swap 
dealing transactions in its de minimis threshold calculation). 
Further, the Commission does not expect a change in the number of 
SDs would result from the Proposed Rule's definition of U.S. person 
and therefore assumes that no additional entities would register as 
U.S. SDs, and no existing SD registrants would deregister as a 
result of the Proposed Rule, if adopted.
    \379\ See 17 CFR 1.3, Swap dealer, paragraph (4).
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    The Proposed Rule would also require Guaranteed Entities to include 
all of their dealing transactions in their de minimis threshold 
calculation without exception.\380\ This approach, which recognizes 
that a Guaranteed Entity's swap dealing transactions may have the same 
potential to impact the U.S. financial system as a U.S. person's 
dealing transactions, closely parallels the approach taken in the 
Guidance with respect to the treatment of the swaps of ``guaranteed 
affiliates.'' \381\ Given that the Proposed Rule would establish a more 
limited definition of ``guarantee'' as compared to the Guidance, and a 
similar definition of guarantee as compared to the Cross-Border Margin 
Rule, the Commission does not expect that the Proposed Rule would cause 
more Guaranteed Entities to register with the Commission. Accordingly, 
the Commission believes that, in this respect, any increase in costs 
associated with the Proposed Rule, with respect to Baselines A and B, 
would be small.
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    \380\ Proposed Sec.  23.23(b)(2)(ii).
    \381\ While the Proposed Rule and the Guidance treat swaps 
involving Guaranteed Entities in a similar manner, they have 
different definitions of the term ``guarantee.'' Under the Guidance, 
a ``guaranteed affiliate'' would generally include all swap dealing 
activities in its de minimis threshold calculation without 
exception. The Guidance interpreted ``guarantee'' to generally 
include ``not only traditional guarantees of payment or performance 
of the related swaps, but also other formal arrangements that, in 
view of all the facts and circumstances, support the non-U.S. 
person's ability to pay or perform its swap obligations with respect 
to its swaps.'' See Guidance, 78 FR at 45320. In contrast, the term 
``guarantee'' in the Proposed Rule has the same meaning as defined 
in Sec.  23.160(a)(2) (cross-border application of the Commission's 
margin requirements for uncleared swaps), except that application of 
the proposed definition of ``guarantee'' would not be limited to 
uncleared swaps. See supra section II.B.
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    Under the Proposed Rule, an SRS would include all swap dealing 
transactions in its de minimis threshold calculation.\382\ Given that 
the concept of an SRS was not included in the Guidance or the Cross-
Border Margin Rule, the Commission believes that this aspect of the 
Proposed Rule would have a similar impact on market participants when 
measured against Baseline A and Baseline B. Under the Guidance, an SRS 
would likely have been categorized as either a conduit affiliate (which 
would have been required to count all dealing swaps towards its de 
minimis threshold calculation) or an Other Non-U.S. Person (which would 
have been required to count only a subset of its dealing swaps towards 
its de minimis threshold calculation). Accordingly, under the Proposed 
Rule, there may be some SRSs that would have to count more swaps 
towards their de minimis threshold calculation than would have been 
required under the Guidance.
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    \382\ Proposed Sec.  23.23(b)(1).
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    However, as noted in sections II.C and III.B, the Commission 
believes that it would be appropriate to distinguish SRSs from Other 
Non-U.S. Persons in determining the cross-border application of the SD 
de minimis threshold to such entities. As discussed above, SRS, as a 
class of entities, presents a greater supervisory interest to the CFTC 
relative to an Other Non-U.S. Person, due to the nature and extent of 
the their relationships with their ultimate U.S. parent entities. Of 
the 60 non-U.S. SDs that were provisionally registered with the 
Commission as of December 2019, the Commission believes that few, if 
any, would be classified as SRSs pursuant to the Proposed Rule. With 
respect to Baseline A, the Commission notes that any potential SRSs 
would have likely classified themselves as conduit affiliates or Other 
Non-U.S. Persons pursuant to the Guidance. Accordingly, some may incur 
incremental costs associated with assessing and implementing the 
additional counting requirements for SRSs. With respect to Baseline B, 
the Commission believes that most potential SRSs would have interpreted 
section 2(i) to require them to count their dealing swaps with U.S. 
persons, but acknowledges that some may not have interpreted section 
2(i) so as to require them to count swaps with non-U.S. persons toward 
their de minimis calculation. Accordingly, such non-U.S. persons would 
incur the incremental costs of associated with the additional SRS 
counting requirements contained in the Proposed Rule. The Commission 
believes that the proposed SRS de minimis calculation requirements 
would prevent regulatory arbitrage by ensuring that certain entities do 
not simply book swaps through a non-U.S. affiliate to avoid CFTC 
registration. Accordingly, the Commission believes that such provisions 
would benefit the swap market by ensuring that the Dodd-Frank Act swap 
provisions addressed by the Proposed Rule are applied specifically to 
entities whose activities, in the aggregate, have a direct and 
significant connection to, and impact on, U.S. commerce.
(ii) Other Non-U.S. Persons
    Under the Proposed Rule, non-U.S. persons that are neither 
Guaranteed Entities nor SRSs would be required to include in their de 
minimis threshold calculations swap dealing activities with U.S. 
persons (other than swaps conducted through a foreign branch of a 
registered SD) and certain swaps with Guaranteed Entities.\383\ The 
Proposed Rule would not, however, require Other Non-U.S. Persons to 
include swap dealing transactions with SRSs or Other Non-U.S. Persons. 
Additionally, Other Non-U.S. Persons would not be required to include 
in their de minimis calculation any transaction that is executed 
anonymously on a DCM, registered or exempt SEF, or registered FBOT, and 
cleared.
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    \383\ Proposed Sec.  23.23(b)(2).
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    The Commission believes that requiring all non-U.S. persons to

[[Page 993]]

include their swap dealing transactions with U.S. persons in their de 
minimis calculations is necessary to advance the goals of the Dodd-
Frank Act SD registration regime, which focuses on U.S. market 
participants and the U.S. market. As discussed above, the Commission 
believes it is appropriate to allow Other Non-U.S. Persons to exclude 
swaps conducted through a foreign branch of a registered SD because, 
generally, such swaps would be subject to Dodd-Frank Act transactional 
requirements and, therefore, would not evade the Dodd-Frank Act regime.
    Given that these requirements are consistent with the Guidance in 
most respects, the Commission believes that the Proposed Rule would 
have a negligible impact on Other Non-U.S. Persons, as measured against 
Baseline A. With respect to Baseline B, the Commission believes that 
most non-U.S. persons would have interpreted CEA section 2(i) to 
require them to count their dealing swaps with U.S. persons, but 
acknowledges that some non-U.S. persons may not have interpreted 2(i) 
so as to require them to count such swaps with non-U.S. persons toward 
their de minimis calculation. Accordingly, such non-U.S. persons would 
incur the incremental costs associated with the counting requirements 
for Other Non-U.S. Persons contained in the Proposed Rule.
    The Commission recognizes that the Proposed Rule's cross-border 
approach to the de minimis threshold calculation could contribute to 
competitive disparities arising between U.S.-based financial groups and 
non-U.S. based financial groups. Potential SDs that are U.S. persons, 
SRSs, or Guaranteed Entities would be required to include all of their 
swap dealing transactions in their de minimis threshold calculations. 
In contrast, Other Non-U.S. Persons would be permitted to exclude 
certain dealing transactions from their de minimis calculations. As a 
result, Guaranteed Entities and SRSs may be at a competitive 
disadvantage, as more of their swap activity would apply toward the de 
minimis threshold (and thereby trigger SD registration) relative to 
Other Non-U.S. Persons.\384\ While the Commission does not believe that 
any additional Other Non-U.S. Persons would be required to register as 
a SD under the Proposed Rule, the Commission acknowledges that to the 
extent that one does, its non-U.S. person counterparties (clients and 
dealers) may possibly cease transacting with it in order to operate 
outside the Dodd-Frank Act swap regime.\385\ Additionally, unregistered 
non-U.S. dealers may be able to offer swaps on more favorable terms to 
non-U.S. persons than their registered competitors because they are not 
required to incur the costs associated with CFTC registration.\386\ As 
noted above, however, the Commission believes that these competitive 
disparities would be mitigated to the extent that foreign jurisdictions 
impose comparable requirements. Given that the Commission has found 
many foreign jurisdictions comparable with respect to various aspects 
of the Dodd-Frank Act swap requirements, the Commission believes that 
such competitive disparities would be negligible.\387\ Further, as 
discussed below, the Commission is proposing to adopt a flexible 
standard of review for comparability determinations relating to the 
group B and group C requirements that would be issued pursuant to the 
Proposed Rule, which would serve to further mitigate any competitive 
disparities arising out of disparate regulatory regimes. Finally, the 
Commission reiterates its belief that the cross-border approach to the 
SD registration threshold taken in the Proposed Rule is appropriately 
tailored to further the policy objectives of the Dodd-Frank Act while 
mitigating unnecessary burdens and disruption to market practices to 
the extent possible.
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    \384\ On the other hand, as noted above, the Commission 
acknowledges that some market participants may prefer to enter into 
swaps with counterparties that are subject to the swaps provisions 
adopted pursuant to the Dodd-Frank Act. Further, Guaranteed Entities 
and SRSs may enjoy other competitive advantages due to the support 
of their guarantor or ultimate U.S. parent entity.
    \385\ Additionally, some unregistered dealers may opt to 
withdraw from the market, thereby contracting the number of dealers 
competing in the swaps market, which may have an adverse effect on 
competition and liquidity.
    \386\ These non-U.S. dealers also may be able to offer swaps on 
more favorable terms to U.S. persons, giving them a competitive 
advantage over U.S. competitors with respect to U.S. counterparties.
    \387\ See supra notes 142 and 337.
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3. Cross-Border Application of the MSP Registration Thresholds
(i) U.S. Persons, Guaranteed Entities, and SRSs
    The Proposed Rule's approach to the cross-border application of the 
MSP registration threshold closely mirrors the proposed approach for 
the SD registration threshold. Under the Proposed Rule, a U.S. person 
would include all of its swap positions in its MSP threshold, without 
exception.\388\ As discussed above, that would include any swap 
conducted through a U.S. person's foreign branch, as such swaps are 
directly attributed to, and therefore impact, the U.S. person. Given 
that this requirement is consistent with the Guidance in this respect, 
the Commission believes that the Proposed Rule would have a minimal 
impact on the status quo with regard to the number of potential U.S 
MSPs, as measured against Baseline A. With respect to Baseline B, all 
of a U.S. person's swap positions would apply toward the MSP threshold 
calculation, even absent the Guidance, pursuant to paragraph (6) of the 
MSP definition.\389\ However, the Commission acknowledges that, absent 
the Guidance, some U.S. persons may not have interpreted CEA section 
2(i) to require them to include swaps conducted through their foreign 
branches in their MSP threshold calculation. Accordingly, with respect 
to Baseline B, the Commission expects that some U.S. persons may incur 
incremental costs as a result of having to count swaps conducted 
through their foreign branches.
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    \388\ Proposed Sec.  23.23(c)(1).
    \389\ 17 CFR 1.3, Major swap participant, paragraph (6).
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    The Proposed Rule would also require Guaranteed Entities to include 
all of their swap positions in their MSP threshold calculation without 
exception.\390\ This approach, which recognizes that such swap 
transactions may have the same potential to impact the U.S. financial 
system as a U.S. person's swap positions, closely parallels the 
approach taken in the Guidance with respect to ``conduit affiliates'' 
and ``guaranteed affiliates.'' \391\ The Commission believes that few, 
if any, additional MSPs would qualify as Guaranteed Entities pursuant 
to the Proposed Rule, as compared to Baseline A. Accordingly, the 
Commission believes that, in this respect, any increase in costs 
associated with the Proposed Rule would be small.
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    \390\ Proposed Sec.  23.23(c)(2)(ii).
    \391\ See Guidance, 78 FR at 45319-20.
---------------------------------------------------------------------------

    Under the Proposed Rule, an SRS would also include all of its swap 
positions in its MSP threshold calculation.\392\ Under the Guidance, an 
SRS would likely have been categorized as either a conduit affiliate 
(which would have been required to count all its swap positions towards 
its MSP threshold calculation) or an Other Non-U.S. Person (which would 
have been required to count only a subset of its swap positions towards 
its MSP threshold calculation). Unlike an Other Non-U.S. Person, SRSs 
would additionally be required to include in

[[Page 994]]

their de minimis calculation any transaction that is executed 
anonymously on a DCM, registered or exempt SEF, or registered FBOT, and 
cleared.
---------------------------------------------------------------------------

    \392\ Proposed Sec.  23.23(c)(1).
---------------------------------------------------------------------------

    As noted in sections II.C and IV.B, the Commission believes that it 
would be appropriate to distinguish SRSs from Other Non-U.S. Persons in 
determining the cross-border application of the MSP threshold to such 
entities, as well as with respect to the Dodd-Frank Act swap provisions 
addressed by the Proposed Rule more generally. As discussed above, 
SRSs, as a class of entities, present a greater supervisory interest to 
the CFTC relative to Other Non-U.S. Persons, due to the nature and 
extent of the their relationships with their ultimate U.S. parent 
entities. Therefore, the Commission believes that it is appropriate to 
require SRSs to include more of their swap positions in their MSP 
threshold calculation than Other Non-U.S. Persons would. Additionally, 
allowing an SRS to exclude all of its non-U.S. swap positions from its 
calculation could incentivize U.S. financial groups to book their non-
U.S. positions into a non-U.S. subsidiary to avoid MSP registration 
requirements. Given that this requirement was not included in the 
Guidance or the Cross-Border Margin Rule, the Commission believes that 
this aspect of the Proposed Rule would have a similar impact on market 
participants when measured against Baseline A and Baseline B. The 
Commission notes that there are no MSPs registered with the Commission, 
and expects that few entities would be required to undertake an 
assessment to determine whether they would qualify as an MSP under the 
Proposed Rule. Any such entities would likely have classified 
themselves as Other Non-U.S. Persons pursuant to the Guidance. 
Accordingly, they may incur incremental costs associated with assessing 
and implementing the additional counting requirements for SRSs. With 
respect to Baseline B, the Commission believes that most potential SRSs 
would have interpreted CEA section 2(i) to require them to count their 
swap positions with U.S. persons, but acknowledges that some may not 
have interpreted CEA section 2(i) so as to require them to count swap 
positions with non-U.S. persons toward their MSP threshold calculation. 
Accordingly, such SRSs would incur the incremental costs associated 
with the additional SRS counting requirements contained in the Proposed 
Rule. The Commission believes that these proposed SRS calculation 
requirements would mitigate regulatory arbitrage by ensuring that U.S. 
entities do not simply book swaps through an SRS affiliate to avoid 
CFTC registration. Accordingly, the Commission believes that such 
provisions would benefit the swap market by ensuring that the Dodd-
Frank Act swap requirements that are addressed by the Proposed Rule are 
applied to entities whose activities have a direct and significant 
connection to, and impact on, the U.S. markets.
(ii) Other Non-U.S. Persons
    Under the Proposed Rule, Other Non-U.S. Persons would be required 
to include in their MSP calculations swap positions with U.S. persons 
(other than swaps conducted through a foreign branch of a registered 
SD) and certain swaps with Guaranteed Entities.\393\ The Proposed Rule 
would not, however, require Other Non-U.S. Persons to include swap 
positions with SRSs or Other Non-U.S. Persons. Additionally, Other Non-
U.S. Persons would not be required to include in their MSP threshold 
calculation any transaction that is executed anonymously on a DCM, a 
registered or exempt SEF, or registered FBOT, and cleared.\394\
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    \393\ Proposed Sec.  23.23(c)(2).
    \394\ Proposed Sec.  23.23(d).
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    Given that these requirements are consistent with the Guidance in 
most respects, the Commission believes that the Proposed Rule would 
have a minimal impact on Other Non-U.S. Persons, as measured against 
Baseline A. With respect to Baseline B, the Commission believes that 
most non-U.S. persons would have interpreted CEA section 2(i) to 
require them to count their swap positions with U.S. persons, but 
acknowledges that some non-U.S. persons may not have interpreted CEA 
section 2(i) so as to require them to count swaps with non-U.S. persons 
toward their MSP threshold calculation. Accordingly, such non-U.S. 
persons would incur the incremental costs of associated with the 
counting requirements for Other Non-U.S. Persons contained in the 
Proposed Rule.
    The Commission recognizes that the Proposed Rule's cross-border 
approach to the MSP threshold calculation could contribute to 
competitive disparities arising between U.S.-based financial groups and 
non-U.S. based financial groups. Potential MSPs that are U.S. persons, 
SRSs, or Guaranteed Entities would be required to include all of their 
swap positions. In contrast, Other Non-U.S. Persons would be permitted 
to exclude certain swap positions from their MSP threshold 
calculations. As a result, SRSs and Guaranteed Entities may be at a 
competitive disadvantage, as more of their swap activity would apply 
toward the MSP calculation and trigger MSP registration relative to 
Other Non-U.S. Persons. While the Commission does not believe that any 
additional Other Non-U.S. Persons would be required to register as an 
MSP under the Proposed Rule, the Commission acknowledges that to the 
extent that a currently unregistered non-U.S. person would be required 
to register as an MSP under the Proposed Rule, its non-U.S. persons may 
possibly cease transacting with it in order to operate outside the 
Dodd-Frank Act swap regime.\395\ Additionally, unregistered non-U.S. 
persons may be able to enter into swaps on more favorable terms to non-
U.S. persons than their registered competitors because they are not 
required to incur the costs associated with CFTC registration.\396\ As 
noted above, however, the Commission believes that these competitive 
disparities would be mitigated to the extent that foreign jurisdictions 
impose comparable requirements. Further, the Commission reiterates its 
belief that the cross-border approach to the MSP registration threshold 
taken in the Proposed Rule aims to further the policy objectives of the 
Dodd-Frank Act while mitigating unnecessary burdens and disruption to 
market practices to the extent possible.
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    \395\ Additionally, some unregistered swap market participants 
may opt to withdraw from the market, thereby contracting the number 
of competitors in the swaps market, which may have an effect on 
competition and liquidity.
    \396\ These non-U.S. market participants also may be able to 
offer swaps on more favorable terms to U.S. persons, giving them a 
competitive advantage over U.S. competitors with respect to U.S. 
counterparties.
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4. Monitoring Costs
    Under the Proposed Rule, market participants would need to continue 
to monitor their swap activities in order to determine whether they 
are, or continue to be, required to register as an SD or MSP. With 
respect to Baseline A, the Commission believes that market participants 
have developed policies and practices consistent with the cross-border 
approach to the SD and MSP registration thresholds expressed in the 
Guidance. Therefore the Commission believes that market participants 
would only incur incremental costs in modifying their existing systems 
and policies and procedures in response to the Proposed Rule (e.g., 
determining which swap activities or positions would be required to be 
included in the registration threshold calculations).\397\
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    \397\ Although the cross-border approach to the MSP registration 
threshold calculation in the Proposed Rule is not identical to the 
approach included in the Guidance (see supra section IV.B.2), the 
Commission believes that any resulting increase in monitoring costs 
resulting from the Proposed Rule being adopted would be incremental 
and de minimis.

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[[Page 995]]

    For example, the Commission notes that SRSs may have adopted 
policies and practices in line with the Guidance's approach to non-U.S. 
persons that are not guaranteed or conduit affiliates and therefore may 
only be currently counting (or be provisionally registered by virtue 
of) their swap dealing transactions with U.S. persons, other than 
foreign branches of U.S. SDs. Although an SRS would be required under 
the Proposed Rule to include all dealing swaps in its de minimis 
calculation, the Commission believes that any increase in monitoring 
costs for SRSs would be negligible, both initially and on an ongoing 
basis, because they already have systems that track swap dealing 
transactions with certain counterparties in place, which includes an 
assessment of their counterparties' status.\398\ The Commission expects 
that any adjustments made to these systems in response to the Proposed 
Rule would be minor.
---------------------------------------------------------------------------

    \398\ See supra section VIII.C.1, for a discussion of assessment 
costs.
---------------------------------------------------------------------------

    With respect to Baseline B, the Commission believes that, absent 
the Guidance, most market participants would have interpreted CEA 
section 2(i) to require them, at a minimum, to monitor their swap 
activities with U.S. persons to determine whether they are, or continue 
to be, required to register as an SD or MSP. Therefore, the Commission 
believes that certain market participants may incur incremental costs 
in modifying their existing systems and policies and procedures in 
response to the Proposed Rule to monitor their swap activity with non-
U.S. persons.
5. Registration Costs
    With respect to Baseline A, the Commission believes that few, if 
any, additional non-U.S. persons would be required to register as a SD 
pursuant to the Proposed Rule. With respect to Baseline B, the 
Commission acknowledges that, absent the Guidance, some non-U.S. 
persons may not have interpreted CEA section 2(i) so as to require them 
to register with the Commission. Accordingly, a subset of such entities 
may be required to register with the Commission pursuant to the 
Proposed Rule, if adopted.
    The Commission acknowledges that if a market participant were 
required to register, it may incur registration costs. The Commission 
previously estimated registration costs in its rulemaking on 
registration of SDs; \399\ however, the costs that may be incurred 
should be mitigated to the extent that these new SDs are affiliated 
with an existing SD, as most of these costs have already been realized 
by the consolidated group. While the Commission cannot anticipate the 
extent to which any potential new registrants would be affiliated with 
existing SDs, it notes that most current registrants are part of a 
consolidated group. The Commission has not included any discussion of 
registration costs for MSPs because it believes that few, if any, 
market participants would be required to register as an MSP under the 
Proposed Rule, as noted above.
---------------------------------------------------------------------------

    \399\ See Registration of Swap Dealers and Major Swap 
Participants, 77 FR at 2623-25.
---------------------------------------------------------------------------

6. Programmatic Costs
    With respect to Baseline A, as noted above, the Commission believes 
that few, if any, additional non-U.S. persons would be required to 
register as a SD under the Proposed Rule. With respect to Baseline B, 
the Commission acknowledges that, absent the Guidance, some non-U.S. 
persons may not have interpreted CEA section 2(i) so as to require them 
to register with the Commission. Accordingly, a subset of such entities 
may be required to register with the Commission pursuant to the 
Proposed Rule, if adopted.
    To the extent that the Proposed Rule acts as a ``gating'' rule by 
affecting which entities engaged in cross-border swap activities must 
comply with the SD requirements, the Proposed Rule, if adopted, could 
result in increased costs for particular entities that otherwise would 
not register as an SD and comply with the swap provisions.\400\
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    \400\ As noted above, the Commission believes that, if the 
Proposed Rule is adopted, few (if any) market participants would be 
required to register as an MSP under the Proposed Rule, and 
therefore it has not included a separate discussion of programmatic 
costs for registered MSPs in this section.
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7. Proposed Exceptions From Group B and Group C Requirements, 
Availability of Substituted Compliance, and Comparability 
Determinations
    As discussed in section VI above, the Commission, consistent with 
section 2(i) of the CEA, is proposing exceptions from, and substituted 
compliance for, certain group A, group B, and group C requirements 
applicable to swap entities, as well as the creation of a framework for 
comparability determinations.
(i) Exceptions
    Specifically, as discussed above in section VI, the Proposed Rule 
includes: (1) The Exchange-Traded Exception from certain group B and 
group C requirements for certain anonymously executed, exchange-traded, 
and cleared foreign-based swaps; (2) the Foreign Swap Group C Exception 
for certain foreign-based swaps with foreign counterparties; (3) the 
Non-U.S. Swap Entity Group B Exception for foreign-based swaps of 
certain non-U.S. swap entities with certain foreign counterparties; and 
(4) the Foreign Branch Group B Exception for certain foreign-based 
swaps of foreign branches of U.S. swap entities with certain foreign 
counterparties.\401\
---------------------------------------------------------------------------

    \401\ As discussed above, these exceptions are similar to ones 
provided in the Guidance.
---------------------------------------------------------------------------

    Under the Proposed Rule, U.S. swap entities (other than their 
foreign branches) would not be excepted from, or eligible for 
substituted compliance for, the Commission's group A, group B, and 
group C requirements. This reflects the Commission's view that these 
requirements should apply fully to registered SDs and MSPs that are 
U.S. persons because their swap activities are particularly likely to 
affect the integrity of the swap market in the United States and raise 
concerns about the protection of participants in those markets. With 
respect to both baselines, the Commission does not expect that this 
would impose any additional costs on market participants given that the 
Commission's relevant business conduct requirements already apply to 
U.S. SDs and MSPs pursuant to existing Commission regulations.
    Pursuant to the Exchange-Traded Exception, non-U.S. swap entities 
and foreign branches of non-U.S. swap entities would generally be 
excluded from the group B and group C requirements with respect to 
their foreign-based swaps that are anonymously executed, exchange-
traded, and cleared.
    Further, pursuant to the Foreign Swap Group C Exception, non-U.S. 
swap entities and foreign branches of U.S. swap entities would be 
excluded from the group C requirements with respect to their foreign-
based swaps with foreign counterparties.
    In addition, pursuant to the Non-U.S. Swap Entity Group B 
Exception, non-U.S. swap entities that are neither SRSs nor Guaranteed 
Entities would be excepted from the group B requirements with respect 
to any foreign-based swap with foreign counterparties that are neither 
SRSs nor Guaranteed Entities.

[[Page 996]]

    Finally, pursuant to the Foreign Branch Group B Exception, foreign 
branches of U.S. swap entities would be excepted from the group B 
requirements, with respect to any foreign-based swap with a foreign 
counterparty that is an Other Non-U.S. Person, subject to certain 
limitations. Specifically, the exception would not be available with 
respect to any group B requirement for which substituted compliance is 
available for the relevant swap, and in any calendar quarter, the 
aggregate gross notional amount of swaps conducted by a U.S. swap 
entity in reliance on the exception may not exceed five percent of the 
aggregate gross notional amount of all its swaps.
    The Commission acknowledges that the group B requirements may apply 
more broadly to swaps between non-U.S. persons than as contemplated in 
the Guidance. Specifically, the Proposed Rule would require swap 
entities that are either Guaranteed Entities or SRSs to comply with the 
group B requirements for swaps with Other Non-U.S. Persons, whereas the 
Guidance stated that all non-U.S. swap entities (other than their U.S. 
branches) were excluded from the group B requirements with respect to 
swaps with a non-U.S. person that is not a guaranteed or conduit 
affiliate. However, the Commission believes that the proposed 
exceptions, coupled with the availability of substituted compliance, 
would help to alleviate any additional burdens that may arise from such 
application. Notwithstanding the availability of these exceptions and 
substituted compliance, the Commission acknowledges that some non-U.S. 
swap entities may incur costs to the extent that a comparability 
determination has not yet been issued for certain jurisdictions. 
Further, the Commission expects that swap entities that avail 
themselves of the proposed exceptions would be able to reduce their 
costs of compliance with respect to the excepted requirements (which, 
to the extent they are similar to requirements in the jurisdiction in 
which they are based, may be potentially duplicative or conflicting). 
The Commission notes that swap entities are not required to take any 
additional action to avail themselves of these exceptions (e.g., 
notification to the Commission) that would cause them to incur 
additional costs. The Commission recognizes that the exceptions (and 
the inherent cost savings) may give certain swap entities a competitive 
advantage with respect to swaps that meet the requirements of the 
exception.\402\ The Commission nonetheless believes that it is 
appropriate to tailor the application of the group B and group C 
requirements in the cross-border context, consistent with section 2(i) 
of the CEA and international comity principles, so as to except these 
foreign-based swaps from the relevant requirements. In doing so, the 
Commission is aiming to reduce market fragmentation which may result by 
applying certain duplicative swap requirements in non-U.S. markets, 
which are often subject to robust foreign regulation. The Commission 
notes that the proposed exceptions are similar to those provided in the 
Guidance. Therefore, the Commission does not expect such exceptions 
would have a significant impact on the costs of, and benefits to, swap 
entities.
---------------------------------------------------------------------------

    \402\ The degree of competitive disparity will depend on the 
degree of disparity between the Commission's requirements and that 
of the relevant foreign jurisdiction.
---------------------------------------------------------------------------

(ii) Substituted Compliance
    As described in section VI.C, the extent to which substituted 
compliance is available under the Proposed Rule would depend on the 
classification of the swap entity or branch and, in certain cases the 
counterparty, to a particular swap. The Commission recognizes that the 
decision to offer any substituted compliance carries certain trade-
offs. Given the global and highly-interconnected nature of the swap 
market, where risk is not bound by national borders, market 
participants are likely to be subject to the regulatory interest of 
more than one jurisdiction. Allowing compliance with foreign swap 
requirements as an alternative to compliance with the Commission's 
requirements can therefore reduce the application of duplicative or 
conflicting requirements, resulting in lower compliance costs and 
potentially facilitating a more efficient regulatory framework over 
time as regulatory regimes compete to have swap transactions occur in 
their respective jurisdictions. Substituted compliance also helps 
preserve the benefits of an integrated, global swap market by fostering 
and advancing efforts among U.S. and foreign regulators to collaborate 
in establishing robust regulatory standards. If not properly 
implemented, however, the Commission's swap regime could lose some of 
its effectiveness. Accordingly, the ultimate costs and benefits of 
substituted compliance are affected by the standard under which it is 
granted and the extent to which it is applied. The Commission was 
mindful of this dynamic in structuring a proposed substituted 
compliance regime for the group A and group B requirements and believes 
the Proposed Rule strikes an appropriate balance, enhancing market 
efficiency and fostering global coordination of these requirements 
while ensuring that swap entities (wherever located) are subject to 
comparable regulation.
    The Commission also understands that by not offering substituted 
compliance equally to all swap entities, the Proposed Rule, if adopted, 
could lead to certain competitive disparities between swap entities. 
For example, to the extent that a non-U.S. swap entity can rely on 
substituted compliance that is not available to a U.S. swap entity, it 
may enjoy certain cost advantages (e.g., avoiding the costs of 
potentially duplicative or inconsistent regulation). The non-U.S. swap 
entity may then be able to pass on these cost savings to their 
counterparties in the form of better pricing or some other benefit. 
U.S. swap entities, on the other hand, could, depending on the extent 
to which foreign swap requirements apply, be subject to both U.S. and 
foreign requirements, and therefore be at a competitive disadvantage. 
Counterparties may also be incentivized to transact with swap entities 
that are offered substituted compliance in order to avoid being subject 
to duplicative or conflicting swap requirements, which could lead to 
increased market deficiencies.\403\
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    \403\ The Commission recognizes that its proposed framework, if 
adopted, may impose certain initial operational costs, as in certain 
cases swap entities will be required to determine the status of 
their counterparties in order to determine the extent to which 
substituted compliance is available.
---------------------------------------------------------------------------

    Nevertheless, the Commission does not believe it is appropriate to 
make substituted compliance broadly available to all swap entities. As 
discussed above, the Commission has a strong supervisory interest in 
the swap activity of all swap entities, including non-U.S. swap 
entities, by virtue of their registration with the Commission. Further, 
U.S. swap entities are particularly key swap market participants and 
their safety and soundness is critical to a well-functioning U.S. swap 
market and the stability of the U.S. financial system. The Commission 
believes that losses arising from the default of a U.S. entity are more 
likely to be borne by other U.S. entities (including parent companies); 
therefore a U.S. entity's risk to the U.S. financial system is more 
acute than that of a similarly situated non-U.S. entity. Accordingly, 
in light of the Commission's supervisory interest in the activities of 
U.S. persons and its statutory obligation to ensure the safety and 
soundness of swap entities and the

[[Page 997]]

U.S. swap market, the Commission believes that it is generally not 
appropriate for substituted compliance to be available to U.S. swap 
entities for purposes of the Proposed Rule. With respect to non-U.S. 
swap entities, however, the Commission believes that, in the interest 
of international comity, making substituted compliance broadly 
available for the requirements discussed in the Proposed Rule is 
appropriate.
(iii) Comparability Determinations
    As noted in section VI.D above, under the Proposed Rule, a 
comparability determination may be requested by: (1) Eligible swap 
entities; (2) trade associations whose members are eligible swap 
entities; or (3) foreign regulatory authorities that have direct 
supervisory authority over eligible swap entities and are responsible 
for administering the relevant foreign jurisdiction's swap 
requirements.\404\ Once a comparability determination is made for a 
jurisdiction, it applies for all entities or transactions in that 
jurisdiction to the extent provided in the determination, as approved 
by the Commission.\405\ Accordingly, given that the Proposed Rule would 
have no impact on any existing comparability determinations, swap 
entities could continue to rely on such determinations with no impact 
on the costs or benefits of such reliance. To the extent that an entity 
wishes to request a new comparability determination pursuant to the 
Proposed Rule, it would incur costs associated with the preparation and 
filing of submission requests. However, the Commission anticipates that 
a person would not elect to incur the costs of submitting a request for 
a comparability determination unless such costs were exceeded by the 
cost savings associated with substituted compliance.
---------------------------------------------------------------------------

    \404\ Proposed Sec.  23.23(g)(2).
    \405\ Proposed Sec.  23.23(f).
---------------------------------------------------------------------------

    The Proposed Rule includes a standard of review that allows for a 
holistic, outcomes-based approach that enables the Commission to 
consider any factor it deems relevant in assessing comparability. 
Further, in determining whether a foreign regulatory requirement is 
comparable to a corresponding Commission requirement, the Proposed Rule 
would allow the Commission to consider the broader context of a foreign 
jurisdiction's related regulatory requirements. Allowing for a 
comparability determination to be made based on comparable outcomes and 
objectives, notwithstanding potential differences in foreign 
jurisdictions' relevant standards, helps to ensure that substituted 
compliance is made available to the fullest extent possible. While the 
Commission recognizes that, to the extent that a foreign swap regime is 
not deemed comparable in all respects, swap entities eligible for 
substituted compliance may incur costs from being required to comply 
with more than one set of specified swap requirements, the Commission 
believes that this approach is preferable to an all-or-nothing 
approach, in which market participants may be forced to comply with 
both regimes in their entirety.
8. Recordkeeping
    The Proposed Rule would also require swap entities to create and 
retain records of their compliance with the Proposed Rule. Given that 
swap entities are already subject to robust recordkeeping requirements, 
the Commission believes that, if the Proposed Rule is adopted, swap 
entities would only incur incremental costs, which are expected to be 
minor, in modifying their existing systems and policies and procedures 
resulting from changes to the status quo made by the Proposed Rule.
9. Section 15(a) Factors
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors.
(i) Protection of Market Participants and the Public
    The Commission believes the Proposed Rule would support protection 
of market participants and the public. By focusing on and capturing 
swap dealing transactions and swap positions involving U.S. persons, 
SRSs, and Guaranteed Entities, the Proposed Rule's approach to the 
cross-border application of the SD and MSP registration threshold 
calculations would work to ensure that, consistent with CEA section 
2(i) and the policy objectives of the Dodd-Frank Act, significant 
participants in the U.S. market are subject to these requirements. The 
proposed cross-border approach to the group A, group B, and group C 
requirements similarly ensures that these requirements would apply to 
swap activities that are particularly likely to affect the integrity of 
and raise concerns about the protection of participants in the U.S. 
market while, consistent with principles of international comity, 
recognizing the supervisory interests of the relevant foreign 
jurisdictions in applying their own requirements to transactions 
involving non-U.S. swap entities and foreign branches of U.S. swap 
entities with non-U.S. persons and foreign branches of U.S. swap 
entities.
(ii) Efficiency, Competitiveness, and Financial Integrity of the 
Markets
    To the extent that the Proposed Rule leads additional entities to 
register as SDs or MSPs, the Commission believes that the Proposed Rule 
could enhance the financial integrity of the markets by bringing 
significant U.S. swap market participants under Commission oversight, 
which may reduce market disruptions and foster confidence and 
transparency in the U.S. market. The Commission recognizes that, if 
adopted, the Proposed Rule's cross-border approach to the SD and MSP 
registration thresholds may create competitive disparities among market 
participants, based on the degree of their connection to the United 
States, that could contribute to market deficiencies, including market 
fragmentation and decreased liquidity, as certain market participants 
may reduce their exposure to the U.S. market. As a result of reduced 
liquidity, counterparties may pay higher prices, in terms of bid-ask 
spreads. Such competitive effects and market deficiencies may, however, 
be mitigated by global efforts to harmonize approaches to swap 
regulation and by the large inter-dealer market, which may link the 
fragmented markets and enhance liquidity in the overall market. The 
Commission believes that the Proposed Rule's approach is necessary and 
appropriately tailored to ensure that the purposes of the Dodd-Frank 
Act swap regime and its registration requirements are advanced while 
still establishing a workable approach that recognizes foreign 
regulatory interests and reduces competitive disparities and market 
deficiencies to the degree possible. The Commission further believes 
that the Proposed Rule's cross-border approach to the group A, group B, 
and group C requirements would promote the financial integrity of the 
markets by fostering transparency and

[[Page 998]]

confidence in the major participants in the U.S. swap markets.
(iii) Price Discovery
    The Commission recognizes that, if adopted, the Proposed Rule's 
approach to the cross-border application of the SD and MSP registration 
thresholds and group A, group B, and group C requirements could also 
have an effect on liquidity, which may in turn influence price 
discovery. As liquidity in the swap market is lessened and fewer 
dealers compete against one another, bid-ask spreads (cost of swap and 
cost to hedge) may widen and the ability to observe an accurate price 
of a swap may be hindered. However, as noted above, these negative 
effects would be mitigated as jurisdictions harmonize their swap 
initiatives and global financial institutions continue to manage their 
swap books (i.e., moving risk with little or no cost, across an 
institution to market centers, where there is the greatest liquidity). 
The Commission does not believe that, if adopted, the Proposed Rule's 
approach to the group A, group B, and group C requirements, however, 
will have a noticeable impact on price discovery.
(iv) Sound Risk Management Practices
    The Commission believes that, if adopted, the Proposed Rule's 
approach could promote the development of sound risk management 
practices by ensuring that significant participants in the U.S. market 
are subject to Commission oversight (via registration), including in 
particular important counterparty disclosure and recordkeeping 
requirements that will encourage policies and practices that promote 
fair dealing while discouraging abusive practices in U.S. markets. On 
the other hand, to the extent that a registered SD or MSP relies on the 
exceptions proposed in this release, and is located in a jurisdiction 
that does not have comparable swap requirements, the Proposed Rule 
could lead to weaker risk management practices for such entities.
(v) Other Public Interest Considerations
    The Commission believes that the Proposed Rule is consistent with 
the principles of international comity.
10. Request for Comment
    The Commission invites comment on all aspects of the costs and 
benefits associated with the Proposed Rule, and specifically requests 
comments on the following questions. Please explain your responses.
    (42) Would additional market participants be required to register 
as SDs (compared to the status quo) as a result of the Proposed Rule 
being adopted? If so, please provide an estimate for the number of such 
market participants. Please include an explanation for the basis of the 
estimate, and associated costs and benefits of the Proposed Rule's 
provisions for SDs (including potential SDs).
    (43) Would any market participants be required to register as an 
MSP as a result of the Proposed Rule being adopted? If so, please 
provide an estimate for the number of such market participants. Please 
include an explanation for the basis of the estimate, and associated 
costs and benefits of the Proposed Rule's provisions for potential 
MSPs.
    (44) The Proposed Rule would not provide relief to swap entities 
that are SRSs or Guaranteed Entities from the group B requirements for 
transactions facing Other Non-U.S. Persons. Thus, under the Proposed 
Rule, SRSs and Guaranteed Entities would generally be required to 
comply with the group B requirements for all of their swaps, rely on 
existing substituted compliance determinations, or seek additional 
substituted compliance determinations. Please provide an estimate for 
the number of swap entities that would be likely to incur compliance 
costs as a result of this aspect of the Proposed Rule, as well as an 
estimate of the associated costs and benefits of such provision. To 
what extent would the proposed availability of substituted compliance 
in such instances affect these costs and benefits?
    (45) The Commission invites information regarding whether and the 
extent to which specific foreign requirement(s) may affect the costs 
and benefits of the Proposed Rule, including information identifying 
the relevant foreign requirement(s) and any monetary or other 
quantitative estimates of the potential magnitude of those costs and 
benefits.
    (46) Would the proposed recordkeeping provision cause registrants 
to incur more than a minor incremental cost to implement? If so, please 
provide an estimate for such costs. Please include an explanation for 
the basis of the estimate, and associated costs and benefits of the 
Proposed Rule's recordkeeping provisions.

D. Antitrust Considerations

    Section 15(b) of the CEA \406\ requires the Commission to ``take 
into consideration the public interest to be protected by the antitrust 
laws and endeavor to take the least anticompetitive means of achieving 
the objectives of [the CEA], as well as the policies and purposes of 
[the CEA], in issuing any order or adopting any Commission rule or 
regulation (including any exemption under section 4(c) or 4c(b), or in 
requiring or approving any bylaw, rule, or regulation of a contract 
market or registered futures association established pursuant to 
section 17 of [the CEA].''
---------------------------------------------------------------------------

    \406\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the Proposed Rule implicates any other 
specific public interest to be protected by the antitrust laws.
    The Commission has considered the Proposed Rule to determine 
whether it is anticompetitive and has preliminarily identified no 
anticompetitive effects. The Commission requests comment on whether the 
Proposed Rule is anticompetitive and, if it is, what the 
anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
Proposed Rule is not anticompetitive and has no anticompetitive 
effects, the Commission has not identified any less anticompetitive 
means of achieving the purposes of the CEA. The Commission requests 
comment on whether there are less anticompetitive means of achieving 
the relevant purposes of the CEA that would otherwise be served by 
adopting the Proposed Rule.

IX. Preamble Summary Tables

A. Table A--Cross-Border Application of the SD De Minimis Threshold

    Table A should be read in conjunction with the text of the Proposed 
Rule.

[[Page 999]]

[GRAPHIC] [TIFF OMITTED] TP08JA20.007

B. Table B--Cross-Border Application of the MSP Threshold

    Table B should be read in conjunction with the text of the Proposed 
Rule.

[[Page 1000]]

[GRAPHIC] [TIFF OMITTED] TP08JA20.008

C. Table C--Cross-Border Application of the Group B Requirements in 
Consideration of Related Exceptions and Substituted Compliance

    Table C \407\ should be read in conjunction with the text of the 
Proposed Rule.
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    \407\ As discussed in section VI.A.2, the group B requirements 
are set forth in Sec. Sec.  23.202, 23.501, 23.502, 23.503, and 
23.504 and relate to (1) swap trading relationship documentation; 
(2) portfolio reconciliation and compression; (3) trade 
confirmation; and (4) daily trading records. Proposed exceptions 
from the group B requirements are discussed in section VI.B.1, 3, 
and 4. Proposed substituted compliance for the group B requirements 
is discussed in section VI.C.2.

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[[Page 1001]]

[GRAPHIC] [TIFF OMITTED] TP08JA20.009

D. Table D--Cross-Border Application of the Group C Requirements in 
Consideration of Related Exceptions

    Table D \408\ should be read in conjunction with the text of the 
Proposed Rule.
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    \408\ As discussed in section VI.A.3, the group C requirements 
are set forth in Sec. Sec.  23.400-451 and relate to certain 
business conduct standards governing the conduct of SDs and MSPs in 
dealing with their swap counterparties. Proposed exceptions from the 
group C requirements are discussed in section VI.B.1 and 2.

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[[Page 1002]]

[GRAPHIC] [TIFF OMITTED] TP08JA20.010

List of Subjects in 17 CFR Part 23

    Business conduct standards, Counterparties, Cross-border, 
Definitions, De minimis exception, Major swap participants, Swaps, Swap 
Dealers.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 23 as follows:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0
1. The authority citation for part 23 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t, 
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

    Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b), 
Public Law 111-203, 124 Stat. 1641 (2010).

0
2. Add Sec.  23.23 to read as follows:


Sec.  23.23  Cross-border application.

    (a) Definitions. For purposes of this section the terms below have 
the following meanings. A person may rely on a written representation 
from its counterparty that the counterparty does or does not satisfy 
the criteria for one or more of the definitions below, unless such 
person knows or has reason to know that the representation is not 
accurate; for the purposes of this rule a person would have reason to 
know the representation is not accurate if a reasonable person should 
know, under all of the facts of which the person is aware, that it is 
not accurate.
    (1) Control including the terms controlling, controlled by, and 
under common control with, means the possession, direct or indirect, of 
the power to direct or cause the direction of the management and 
policies of a person, whether through the ownership of voting shares, 
by contract, or otherwise.
    (2) Foreign branch means any office of a U.S. bank that:
    (i) Is located outside the United States;
    (ii) Operates for valid business reasons;
    (iii) Maintains accounts independently of the home office and of 
the accounts of other foreign branches, with the profit or loss accrued 
at each branch determined as a separate item for each foreign branch; 
and
    (iv) Is engaged in the business of banking and is subject to 
substantive regulation in banking or financing in the jurisdiction 
where it is located.
    (3) Foreign counterparty means:
    (i) A non-U.S. person, except with respect to a swap conducted 
through a U.S. branch of that non-U.S. person; or
    (ii) A foreign branch where it enters into a swap in a manner that 
satisfies the definition of a swap conducted through a foreign branch.
    (4) Foreign-based swap means:
    (i) A swap by a non-U.S. swap entity, except for a swap conducted 
through a U.S. branch; or
    (ii) A swap conducted through a foreign branch.
    (5) Group A requirements mean the requirements set forth in 
Sec. Sec.  3.3, 23.201, 23.203, 23.600, 23.601, 23.602, 23.603, 23.605, 
23.606, 23.607, and 23.609 of this chapter.
    (6) Group B requirements mean the requirements set forth in 
Sec. Sec.  23.202 and 23.501-504.
    (7) Group C requirements mean the requirements set forth in 
Sec. Sec.  23.400-451.
    (8) Guarantee means an arrangement pursuant to which one party to a 
swap has rights of recourse against a

[[Page 1003]]

guarantor, with respect to its counterparty's obligations under the 
swap. For these purposes, a party to a swap has rights of recourse 
against a guarantor if the party has a conditional or unconditional 
legally enforceable right to receive or otherwise collect, in whole or 
in part, payments from the guarantor with respect to its counterparty's 
obligations under the swap. In addition, in the case of any arrangement 
pursuant to which the guarantor has a conditional or unconditional 
legally enforceable right to receive or otherwise collect, in whole or 
in part, payments from any other guarantor with respect to the 
counterparty's obligations under the swap, such arrangement will be 
deemed a guarantee of the counterparty's obligations under the swap by 
the other guarantor.
    (9) Non-U.S. person means any person that is not a U.S. person.
    (10) Non-U.S. swap entity means a swap entity that is not a U.S. 
swap entity.
    (11) Parent entity means any entity in a consolidated group that 
has one or more subsidiaries in which the entity has a controlling 
interest, as determined in accordance with U.S. GAAP.
    (12) Significant risk subsidiary means any non-U.S. significant 
subsidiary of an ultimate U.S. parent entity where the ultimate U.S. 
parent entity has more than $50 billion in global consolidated assets, 
as determined in accordance with U.S. GAAP at the end of the most 
recently completed fiscal year, but excluding non-U.S. subsidiaries 
that are:
    (i) Subject to consolidated supervision and regulation by the Board 
of Governors of the Federal Reserve System as a subsidiary of a U.S. 
bank holding company; or
    (ii) Subject to capital standards and oversight by the subsidiary's 
home country supervisor that are consistent with the Basel Committee on 
Banking Supervision's ``International Regulatory Framework for Banks'' 
and subject to margin requirements for uncleared swaps in a 
jurisdiction for which the Commission has issued a comparability 
determination.
    (13) Significant subsidiary means a subsidiary, including its 
subsidiaries, which meets any of the following conditions:
    (i) The three year rolling average of the subsidiary's equity 
capital is equal to or greater than five percent of the three year 
rolling average of the ultimate U.S. parent entity's consolidated 
equity capital, as determined in accordance with U.S. GAAP as of the 
end of the most recently completed fiscal year;
    (ii) The three year rolling average of the subsidiary's total 
revenue is equal to or greater than ten percent of the three year 
rolling average of the ultimate U.S. parent entity's total consolidated 
revenue, as determined in accordance with U.S. GAAP as of the end of 
the most recently completed fiscal year; or
    (iii) The three year rolling average of the subsidiary's total 
assets is equal to or greater than ten percent of the three year 
rolling average of the ultimate U.S. parent entity's total consolidated 
assets, as determined in accordance with U.S. GAAP as of the end of the 
most recently completed fiscal year.
    (14) Subsidiary means a subsidiary of a specified person that is an 
affiliate controlled by such person directly, or indirectly through one 
or more intermediaries. For purposes of this definition, an affiliate 
of, or a person affiliated with, a specific person is a person that 
directly, or indirectly through one or more intermediaries, controls, 
or is controlled by, or is under common control with, the person 
specified.
    (15) Swap entity means a person that is registered with the 
Commission as a swap dealer or major swap participant pursuant to the 
Act.
    (16) Swap conducted through a foreign branch means a swap entered 
into by a foreign branch where:
    (i) The foreign branch or another foreign branch is the office 
through which the U.S. person makes and receives payments and 
deliveries under the swap pursuant to a master netting or similar 
trading agreement, and the documentation of the swap specifies that the 
office for the U.S. person is such foreign branch;
    (ii) The swap is entered into by such foreign branch in its normal 
course of business; and
    (iii) The swap is reflected in the local accounts of the foreign 
branch.
    (17) Swap conducted through a U.S. branch means a swap entered into 
by a U.S. branch where:
    (i) The U.S. branch is the office through which the non-U.S. person 
makes and receives payments and deliveries under the swap pursuant to a 
master netting or similar trading agreement, and the documentation of 
the swap specifies that the office for the non-U.S. person is such U.S. 
branch; or
    (ii) The swap is reflected in the local accounts of the U.S. 
branch.
    (18) Ultimate U.S. parent entity means the U.S. parent entity that 
is not a subsidiary of any other U.S. parent entity.
    (19) United States and U.S. means the United States of America, its 
territories and possessions, any State of the United States, and the 
District of Columbia.
    (20) U.S. branch means a branch or agency of a non-U.S. banking 
organization where such branch or agency:
    (i) Is located in the United States;
    (ii) Maintains accounts independently of the home office and other 
U.S. branches, with the profit or loss accrued at each branch 
determined as a separate item for each U.S. branch; and
    (iii) Engages in the business of banking and is subject to 
substantive banking regulation in the state or district where located.
    (21) U.S. GAAP means U.S. generally accepted accounting principles.
    (22) U.S. person: (i) Except as provided in paragraph (a)(22)(iii) 
of this section, U.S. person means any person that is:
    (A) A natural person resident in the United States;
    (B) A 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;
    (C) An account (whether discretionary or non-discretionary) of a 
U.S. person; or
    (D) An estate of a decedent who was a resident of the United States 
at the time of death.
    (ii) For purposes of this section, principal place of business 
means the location from which the officers, partners, or managers of 
the legal person primarily direct, control, and coordinate the 
activities of the legal person. With respect to an externally managed 
investment vehicle, this location is the office from which the manager 
of the vehicle primarily directs, controls, and coordinates the 
investment activities of the vehicle.
    (iii) The term U.S. person does not include the International 
Monetary Fund, the International Bank for Reconstruction and 
Development, the Inter-American Development Bank, the Asian Development 
Bank, the African Development Bank, the United Nations, and their 
agencies and pension plans, and any other similar international 
organizations, their agencies and pension plans.
    (iv) Notwithstanding paragraph (a)(22)(i) of this section, until 
December 31, 2025, a person may continue to classify counterparties as 
U.S. persons based on representations that were previously made 
pursuant to the ``U.S. person'' definition in Sec.  23.160(a)(10).
    (23) U.S. swap entity means a swap entity that is a U.S. person.

[[Page 1004]]

    (b) Cross-border application of de minimis registration threshold 
calculation. For purposes of determining whether an entity engages in 
more than a de minimis quantity of swap dealing activity under 
paragraph (4)(i) of the swap dealer definition in Sec.  1.3 of this 
chapter, a person shall include the following swaps (subject to 
paragraph (6) of the swap dealer definition in Sec.  1.3 of this 
chapter):
    (1) If such person is a U.S. person or a significant risk 
subsidiary, all swaps connected with the dealing activity in which such 
person engages.
    (2) If such person is a non-U.S. person (other than a significant 
risk subsidiary), all of the following swaps connected with the dealing 
activity in which such person engages:
    (i) Swaps with a counterparty that is a U.S. person, other than 
swaps conducted through a foreign branch of a registered swap dealer.
    (ii) Swaps where the obligations of such person under the swaps are 
subject to a guarantee by a U.S. person.
    (iii) Swaps with a counterparty that is a non-U.S. person where the 
counterparty's obligations under the swaps are subject to a guarantee 
by a U.S. person, except when:
    (A) The counterparty is registered as a swap dealer; or
    (B) The counterparty's swaps are subject to a guarantee by a U.S. 
person that is a non-financial entity.
    (c) Application of major swap participant tests in the cross-border 
context. For purposes of determining a person's status as a major swap 
participant, as defined in Sec.  1.3 of this chapter, a person shall 
include the following swap positions:
    (1) If such person is a U.S. person or a significant risk 
subsidiary, all swap positions that are entered into by the person.
    (2) If such person is a non-U.S. person (other than a significant 
risk subsidiary), all of the following swap positions of such person:
    (i) Swap positions where the counterparty is a U.S. person, other 
than swaps conducted through a foreign branch of a registered swap 
dealer.
    (ii) Swap positions where the obligations of such person under the 
swaps are subject to a guarantee by a U.S. person.
    (iii) Swap positions with a counterparty that is a non-U.S. person 
where the counterparty's obligations under the swaps are subject to a 
guarantee by a U.S. person, except when the counterparty is registered 
as a swap dealer.
    (d) Notwithstanding any other provision of Sec.  23.23, for 
purposes of determining whether a non-U.S. person (other than a 
significant risk subsidiary or a non-U.S. person whose performance 
under the swap is subject to a guarantee by a U.S. person) engages in 
more than a de minimis quantity of swap dealing activity under 
paragraph (4)(i) of the swap dealer definition in Sec.  1.3 of this 
chapter or for determining the non-U.S. person's status as a major swap 
participant as defined in Sec.  1.3 of this chapter, such non-U.S. 
person does not need to count any swaps or swap positions, as 
applicable, that are entered into by such non-U.S. person on a 
designated contract market, a registered swap execution facility or a 
swap execution facility exempted from registration by the Commission 
pursuant to section 5h(g) of the Act, or a registered foreign board of 
trade, and cleared through a registered derivatives clearing 
organization or a clearing organization that has been exempted from 
registration by the Commission pursuant to section 5b(h) of the Act, 
where the non-U.S. person does not know the identity of the 
counterparty to the swap prior to execution.
    (e) Exceptions from certain swap requirements for certain foreign-
based swaps. (1) With respect to its foreign-based swaps, each non-U.S. 
swap entity and foreign branch of a U.S. swap entity shall be excepted 
from:
    (i) The group B requirements (other than Sec. Sec.  23.202(a) 
through 23.202(a)(1)) and the group C requirements with respect to any 
swap (i) entered into on a designated contract market, a registered 
swap execution facility or a swap execution facility exempted from 
registration by the Commission pursuant to section 5h(g) of the Act, or 
a registered foreign board of trade; (ii) cleared through a registered 
derivatives clearing organization or a clearing organization that has 
been exempted from registration by the Commission pursuant to section 
5b(h) of the Act; and (iii) where the swap entity does not know the 
identity of the counterparty to the swap prior to execution; and
    (ii) The group C requirements with respect to any swap with a 
foreign counterparty.
    (2) With respect to its foreign-based swaps, each non-U.S. swap 
entity that is neither a significant risk subsidiary nor a person whose 
performance under the swap is subject to a guarantee by a U.S. person 
shall be excepted from the group B requirements with respect to any 
swap with a foreign counterparty (other than a foreign branch) that is 
neither a significant risk subsidiary nor a person whose performance 
under the swap is subject to a guarantee by a U.S. person.
    (3) With respect to its foreign-based swaps, each foreign branch of 
a U.S. swap entity shall be excepted from the group B requirements with 
respect to any swap with a foreign counterparty (other than a foreign 
branch) that is neither a significant risk subsidiary nor a person 
whose performance under the swap is subject to a guarantee by a U.S. 
person, provided that:
    (i) This exception shall not be available with respect to any group 
B requirement for a swap that is eligible for substituted compliance 
for such group B requirement pursuant to a comparability determination 
issued by the Commission prior to the execution of the swap; and
    (ii) In any calendar quarter, the aggregate gross notional amount 
of swaps conducted by a swap entity in reliance on this exception shall 
not exceed five percent of the aggregate gross notional amount of all 
its swaps.
    (f) Substituted Compliance. (1) A non-U.S. swap entity may satisfy 
any applicable group A requirement by complying with the corresponding 
requirement of a foreign jurisdiction for which the Commission has 
issued a comparability determination under paragraph (g) of this 
section; and
    (2) With respect to its foreign-based swaps, a non-U.S. swap entity 
or foreign branch of a U.S. swap entity may satisfy any applicable 
group B requirement for a swap with a foreign counterparty by complying 
with the corresponding requirement of a foreign jurisdiction for which 
the Commission has issued a comparability determination under paragraph 
(g) of this section.
    (g) Comparability determinations. (1) The Commission may issue 
comparability determinations under this section on its own initiative.
    (2) Eligibility requirements. The following persons may, either 
individually or collectively, request a comparability determination 
with respect to some or all of the group A requirements and group B 
requirements:
    (i) A swap entity that is eligible, in whole or in part, for 
substituted compliance under this section or a trade association or 
other similar group on behalf of its members who are such swap 
entities; or
    (ii) A foreign regulatory authority that has direct supervisory 
authority over one or more swap entities subject to the group A 
requirements and/or group B requirements and that is responsible for 
administering the relevant foreign jurisdiction's swap standards.
    (3) Submission requirements. Persons requesting a comparability 
determination pursuant to this section

[[Page 1005]]

shall electronically provide the Commission:
    (i) A description of the objectives of the relevant foreign 
jurisdiction's standards and the products and entities subject to such 
standards;
    (ii) A description of how the relevant foreign jurisdiction's 
standards address, at minimum, each element of the Commission's 
corresponding requirements. Such description should identify the 
specific legal and regulatory provisions that correspond to each 
element and, if necessary, whether the relevant foreign jurisdiction's 
standards do not address a particular element;
    (iii) A description of the differences between the relevant foreign 
jurisdiction's standards and the Commission's corresponding 
requirements, and an explanation regarding how such differing 
approaches achieve comparable outcomes;
    (iv) A description of the ability of the relevant foreign 
regulatory authority or authorities to supervise and enforce compliance 
with the relevant foreign jurisdiction's standards. Such description 
should discuss the powers of the foreign regulatory authority or 
authorities to supervise, investigate, and discipline entities for 
compliance with the standards and the ongoing efforts of the regulatory 
authority or authorities to detect and deter violations of, and ensure 
compliance with, the standards;
    (v) Copies of the foreign jurisdiction's relevant standards 
(including an English translation of any foreign language document); 
and
    (vi) Any other information and documentation that the Commission 
deems appropriate.
    (4) Standard of review. The Commission may issue a comparability 
determination pursuant to this section to the extent that it determines 
that some or all of the relevant foreign jurisdiction's standards are 
comparable to the Commission's corresponding requirements, after taking 
into account such factors as the Commission determines are appropriate, 
which may include:
    (i) The scope and objectives of the relevant foreign jurisdiction's 
standards;
    (ii) Whether the relevant foreign jurisdiction's standards achieve 
comparable outcomes to the Commission's corresponding requirements;
    (iii) The ability of the relevant regulatory authority or 
authorities to supervise and enforce compliance with the relevant 
foreign jurisdiction's standards; and
    (iv) Whether the relevant regulatory authority or authorities has 
entered into a memorandum of understanding or other arrangement with 
the Commission addressing information sharing, oversight, examination, 
and supervision of swap entities relying on such comparability 
determination.
    (5) Reliance. Any swap entity that, in accordance with a 
comparability determination issued under this section, complies with a 
foreign jurisdiction's standards, would be deemed to be in compliance 
with the Commission's corresponding requirements. Accordingly, if a 
swap entity has failed to comply with the foreign jurisdiction's 
standards or a comparability determination, the Commission may initiate 
an action for a violation of the Commission's corresponding 
requirements. All swap entities, regardless of whether they rely on a 
comparability determination, remain subject to the Commission's 
examination and enforcement authority.
    (6) Discretion and Conditions. The Commission may issue or decline 
to issue comparability determinations under this section in its sole 
discretion. In issuing such a comparability determination, the 
Commission may impose any terms and conditions it deems appropriate.
    (7) Modifications. The Commission reserves the right to further 
condition, modify, suspend, terminate or otherwise restrict a 
comparability determination issued under this section in the 
Commission's discretion.
    (8) Delegation of authority. The Commission hereby delegates to the 
Director of the Division of Swap Dealer and Intermediary Oversight, or 
such other employee or employees as the Director may designate from 
time to time, the authority to request information and/or documentation 
in connection with the Commission's issuance of a comparability 
determination under this section.
    (h) Records. Swap dealers and major swap participants shall create 
a record of their compliance with this section and shall retain records 
in accordance with Sec.  23.203 of this chapter.
* * * * *

    Issued in Washington, DC, on December 20, 2019, by the 
Commission.
Robert Sidman,
Deputy Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Cross-Border Application of the Registration Thresholds 
and Certain Requirements Applicable to Swap Dealers and Major Swap 
Participants--Commission Voting Summary and Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Tarbert and Commissioners Quintenz and 
Stump voted in the affirmative. Commissioners Behnam and Berkovitz 
voted in the negative.

Appendix 2--Supporting Statement of Chairman Heath Tarbert

    I am pleased to support the Commission's proposed rule on the 
cross-border application of registration thresholds and certain 
requirements for swap dealers and major swap participants. It is 
critical that the CFTC finalize a sensible cross-border registration 
rule in 2020, as we approach the 10-year anniversary of the Dodd-
Frank Act.

Need for Rule-Based Finality

    Since 2013, market participants have been relying on cross-
border ``interpretive guidance,'' \1\ which was published outside 
the standard rulemaking process under the Administrative Procedure 
Act (APA).\2\ Although this policy statement has had a sweeping 
impact on participants in the global swaps market, it is technically 
not enforceable. Market participants largely follow the 2013 
Guidance, but they are not legally required to do so.\3\ Over the 
intervening years, a patchwork of staff advisories and no-action 
letters has supplemented the 2013 Guidance. With almost seven years 
of experience, it is high time for the Commission to bring finality 
to the issues the 2013 Guidance and its progeny address.
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    \1\ Interpretive Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 
2013) (``2013 Guidance''), http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2013-17958a.pdf.
    \2\ 5 U.S.C. 551 et seq.
    \3\ As then Commissioner Scott O'Malia pointed out regarding the 
2013 Guidance: ``Legally binding regulations that impose new 
obligations on affected parties--`legislative rules'--must conform 
to the APA.'' Appendix 3--Dissenting Statement of Commissioner Scott 
D. O'Malia, 2013 Guidance at 45372 (citing Chrysler Corp. v. Brown, 
441 U.S. 281, 302-03 (1979) (agency rulemaking with the force and 
effect of law must be promulgated pursuant to the procedural 
requirements of the APA)).
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    We call this a ``cross-border'' proposal, and in certain 
respects it is. For example, the proposed rule addresses when non-
U.S. persons must count dealing swaps with U.S. persons, including 
foreign branches of American banks, toward the de minimis threshold 
in our swap dealer definition. More fundamentally, however, the 
proposed rule answers a basic question: What swap dealing activity 
outside the United States should trigger CFTC registration and other 
requirements?

[[Page 1006]]

Congressional Mandate

    To answer this question, we must turn to section 2(i) of the 
Commodity Exchange Act (``CEA''), a provision Congress added in 
Title VII of the Dodd-Frank Act.\4\ Section 2(i) provides that the 
CEA does not apply to swaps activities outside the United States 
except in two circumstances: (1) Where activities have a ``direct 
and significant connection with activities in, or effect on, 
commerce of the United States'' or (2) where they run afoul of the 
Commission's rules or regulations that prevent evasion of Title 
VII.\5\ Section 2(i) evidences Congress's clear intent for the U.S. 
swaps regulatory regime to stop at the water's edge, except where 
foreign activities either are closely and meaningfully related to 
U.S. markets or are vehicles to evade our laws and regulations.
---------------------------------------------------------------------------

    \4\ 7 U.S.C. 2(i).
    \5\ Id.
---------------------------------------------------------------------------

    I believe the proposed rule before us today is a levelheaded 
approach to the exterritorial application of our swap dealer 
registration regime and related requirements. The proposed rule 
would fully implement the congressional mandate in section 2(i). At 
the same time, it acknowledges the important role played by the 
CFTC's domestic and international counterparts in regulating what is 
a global swaps market. In short, the proposal employs neither a 
full-throated ``intergalactic commerce clause'' \6\ nor an 
isolationist mentality. It is thoughtful and balanced.
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    \6\ See Commissioner Jill E. Sommers, Statement of Concurrence: 
(1) Cross-Border Application of Certain Swaps Provisions of the 
Commodity Exchange Act, Proposed Interpretive Guidance and Policy 
Statement; (2) Notice of Proposed Exemptive Order and Request for 
Comment Regarding Compliance with Certain Swap Regulations (June 29, 
2012), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/sommersstatement062912 (noting that ``staff had 
been guided by what could only be called the `Intergalactic Commerce 
Clause' of the United States Constitution, in that every single swap 
a U.S. person enters into, no matter what the swap or where it was 
transacted, was stated to have a direct and significant connection 
with activities in, or effect on, commerce of the United States'').
---------------------------------------------------------------------------

Guiding Principles for Regulating Foreign Activities

    For my part, I am guided by three additional principles in 
considering the extent to which the CFTC should make full use of its 
extraterritorial powers.

(1) Protect the National Interest

    An important role of the CFTC is to protect and advance the 
interests of the United States. In this instance, Congress provided 
the CFTC with explicit extraterritorial power to safeguard the U.S. 
financial system where swaps activities are concerned. We need to 
think continually about the potential outcome for American 
taxpayers. We cannot have a regulatory framework that incentivizes 
further bailouts of large financial institutions. We therefore need 
to ensure that risk created outside the United States does not flow 
back into our country.
    But it is not just any risk outside the United States that we 
must guard against. Congress made that clear in section 2(i). We 
must not regulate swaps activities in far flung lands simply to 
prevent every risk that might have a nexus to the United States. 
That would be a markedly poor use of American taxpayers' dollars. It 
would also divert the CFTC from channeling our resources where they 
matter the most: To our own markets and participants. The proposal 
therefore focuses on instances when material risks from abroad are 
most likely to come back to the United States and where no one but 
the CFTC is responsible for those risks.
    Hence, guarantees of offshore swaps by U.S. parent companies are 
counted toward our registration requirements because that risk is 
effectively underwritten and borne in the United States. The same is 
true with the concept of a ``significant risk subsidiary'' (SRS). An 
SRS is a large non-U.S. subsidiary of a large U.S. company that 
deals in swaps outside the United States but (1) is not subject to 
comparable capital and margin requirements in its home country, and 
(2) is not a subsidiary of a holding company subject to consolidated 
supervision by an American regulator, namely the Federal Reserve 
Board. As a consequence, our cross-border rule would require an SRS 
to register as a swap dealer or major swap participant with the CFTC 
if the SRS exceeds the same registration thresholds as a U.S. firm 
operating within the United States. The national interest demands 
it.\7\
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    \7\ The SRS concept has been designed to address a potential 
situation where a U.S. entity establishes an offshore subsidiary to 
conduct its swap dealing business without an explicit guarantee on 
the swaps in order to avoid the Dodd-Frank Act. For example, the 
U.S.-regulated insurance company American International Group 
(``AIG'') nearly failed as a result of risk incurred by the London 
swap trading operations of its subsidiary AIG Financial Products. 
See, e.g., Congressional Oversight Panel, June Oversight Report, The 
AIG Rescue, Its Impact on Markets, and the Government's Exit 
Strategy (June 10, 2010), available at: http://www.gpo.gov/fdsys/pkg/CPRT-111JPRT56698/pdf/CPRT-111JPRT56698.pdf. If the Commission 
did not regulate SRS, an AIG-type entity could establish a non-U.S. 
affiliate to conduct its swaps dealing business, and, so long as it 
did not explicitly guarantee the swaps, it would avoid application 
of the Dodd-Frank Act and bring risk created offshore back into the 
United States without appropriate regulatory safeguards.
---------------------------------------------------------------------------

(2) Follow Kant's Categorical Imperative

    Rarely does the name of Immanuel Kant, the famous 18th century 
German philosopher, come up when talking about financial 
regulation.\8\ One of the lasting contributions Kant made to Western 
thought was his concept of the ``categorical imperative.'' In 
deducing the laws of ethical behavior, i.e., how people should treat 
one another, he came up with a simple test: We should act according 
to the maxim that we wish all other rational people to follow, as if 
it were a universal law.\9\ Kant's categorical imperative is also a 
good foundation for considering cross-border rulemaking here at the 
CFTC.
---------------------------------------------------------------------------

    \8\ Yet even at first glance, derivatives regulation and Kant's 
philosophy share some strikingly common attributes. Title 17 of the 
Code of Federal Regulation (CFR) and The Critique of Pure Reason 
(Kritik der reinen Vernunft) (1781) are impenetrable to all but a 
handful of subject matter experts. And scholars spend decades 
writing and thinking about them, often coming up with more questions 
than answers.
    \9\ ``Act only according to that maxim whereby you can, at the 
same time, will that it should become a universal law.'' Immanuel 
Kant, Grounding for the Metaphysics of Morals (1785) [1993], 
translated by James W. Ellington (3rd ed.).
---------------------------------------------------------------------------

    What I take from it is that we should adopt a regulatory regime 
that we would like all other jurisdictions to follow as if it were a 
universal law. How does this work? Let me start by explaining how it 
does not work. If we impose our regulations on non-U.S. persons 
whenever they have a remote nexus to the United States, then we 
should be willing for all other jurisdictions to do the same. The 
end result would be absurdity, with everyone trying to regulate 
everyone else. And the duplicative and overlapping regulations would 
inevitably lead to fragmentation in the global swaps market--itself 
a potential source of systemic risk.\10\ Instead, we should adopt a 
framework that applies CFTC regulations outside the United States 
only when it addresses one or more important risks to our country.
---------------------------------------------------------------------------

    \10\ See FSB Report on Market Fragmentation (June 4, 2019), 
available at: https://www.fsb.org/wp-content/uploads/P040619-2.pdf.
---------------------------------------------------------------------------

    Furthermore, we should afford comity to other regulators who 
have adopted comparable regulations, just as we expect them to do 
for us. This is especially important when we evaluate whether 
foreign subsidiaries of U.S. parents could pose a significant risk 
to our financial system. The categorical imperative leads us to an 
unavoidable result: We should not impose our regulations on the non-
U.S. activities of non-U.S. companies in those jurisdictions that 
have comparable capital and margin requirements to our own.\11\ By 
the same token, when U.S. subsidiaries of foreign companies operate 
within our borders, we expect them to follow our laws and 
regulations and not apply rules from their home country.
---------------------------------------------------------------------------

    \11\ See, e.g., Comments of the European Commission in respect 
of CFTC Staff Advisory No. 13-69 regarding the applicability of 
certain CFTC regulations to the activity in the United States of 
swap dealers and major swap participants established in 
jurisdictions other than the United States (Mar. 10, 2014), 
available at: https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59781&SearchText= (``In order to ensure that 
cross-border activity is not inhibited by the application of 
inconsistent, conflicting or duplicative rules, regulators must work 
together to provide for the application of one set of comparable 
rules, where our rules achieve the same outcomes. Rules should 
therefore include the possibility to defer to those of the host 
regulator in most cases.'').
---------------------------------------------------------------------------

    Charity, it is often said, begins at home. The categorical 
imperative further compels us to avoid duplicating the work of other 
American regulators. If a foreign subsidiary of a U.S. financial 
institution is subject to consolidated regulation and supervision by 
the Federal Reserve Board, then we should rely on our domestic 
counterparts to do their jobs when it is a question of dealing 
activity outside the United States. The Federal Reserve Board has 
extensive regulatory and supervisory tools to ensure a financial

[[Page 1007]]

holding company is prudent in its risk taking at home and 
abroad.\12\ The CFTC does not have similar experience, and therefore 
should focus on regulating dealing activity within the United States 
or with U.S. persons.
---------------------------------------------------------------------------

    \12\ For example, the Federal Reserve Board requires all foreign 
branches and subsidiaries ``to ensure that their operations conform 
to high standards of banking and financial prudence.'' 12 CFR 
211.13(a)(1). Furthermore, they are subject to examinations on 
compliance. See Bank Holding Company Supervision Manual, Section 
3550.0.9 (``The procedures involved in examining foreign 
subsidiaries of domestic bank holding companies are generally the 
same as those used in examining domestic subsidiaries engaged in 
similar activities.'').
---------------------------------------------------------------------------

(3) Pursue SEC Harmonization Where Appropriate

    In the jurisdictional fight over swaps, Congress split the baby 
between the CFTC and the SEC in Title VII of the Dodd-Frank Act.\13\ 
The SEC got jurisdiction over security-based swaps, and we got 
jurisdiction over all other swaps--the vast majority of the current 
market.\14\ Congress also required both Commissions to consult and 
coordinate our respective regulatory approaches, and required us to 
treat economically similar entities or products in a similar 
manner.\15\ Simple enough, right? Wrong.
---------------------------------------------------------------------------

    \13\ This was unfortunately nothing new. On a number of 
occasions prior to the Dodd-Frank Act, the CFTC and SEC fought over 
jurisdiction of certain derivative products. See, e.g., In Board of 
Trade of the City Of Chicago v. Securities and Exchange Commission, 
677 F. 2d 1137 (7th Cir. 1982) (finding that the SEC lacked the 
authority to approve CBOE to trade options on mortgage-backed 
securities because the options fell within the CFTC's exclusive 
jurisdiction).
    \14\ The swaps market is significantly larger than the security-
based swaps market. Aggregating across all major asset classes in 
the global derivatives market, dominated by interest rates and FX, 
the ratio exceeds 95% swaps to 5% security-based swaps by notional 
amount outstanding. This ratio holds even with relatively 
conservative assumptions like assigning all equity swaps (a small 
asset class) to the security-based swaps category. See Bank for 
International Settlements, OTC derivatives outstanding (Updated 8 
December 2019), available at: https://www.bis.org/statistics/derstats.htm.
    \15\ See Section 712(a)(7) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The CFTC and the SEC could not even agree on a basic concept 
that is not even particular to financial regulation: Who is a ``U.S. 
person.'' In what can only be described as a bizarre series of 
events, the CFTC and the SEC adopted different definitions of ``U.S. 
person'' in our respective cross-border regimes. I find it surreal 
that two federal agencies that regulate similar products pursuant to 
the same title of the same statute--with an explicit mandate to 
``consult and coordinate'' with each other--have not agreed until 
today on how to define ``U.S. person.'' This failure to coordinate 
has increased operational and compliance costs for market 
participants.\16\ And that is why I am pleased that our proposal 
uses the same definition of U.S. person that is in the SEC's cross-
border rulemaking.
---------------------------------------------------------------------------

    \16\ See, e.g., Futures Industry Association Letter re: 
Harmonization of SEC and CFTC Regulatory Frameworks (Nov. 29, 2018), 
available at: https://fia.org/articles/fia-offers-recommendations-cftc-and-sec-harmonization.
---------------------------------------------------------------------------

    To be sure, as my colleagues have said on several occasions, we 
should not harmonize with the SEC merely for the sake of 
harmonization.\17\ I agree that we should harmonize only if it is 
sensible. In the first instance, we must determine whether Congress 
has explicitly asked us to do something different or implicitly did 
so by giving us a different statutory mandate. It also requires us 
to consider whether differences in our respective products or 
markets warrant a divergent approach. Just as the proposed rule 
takes steps toward harmonization, it also diverges where 
appropriate.
---------------------------------------------------------------------------

    \17\ See, e.g., Dissenting Statement of Commissioner Dan M. 
Berkovitz, Rulemaking to Provide Exemptive Relief for Family Office 
CPOs: Customer Protection Should be More Important than Relief for 
Billionaires (Nov. 25, 2019), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement112519 (``The 
Commission eliminates the notice requirement largely on the basis 
that this will harmonize the Commission's regulations with those of 
the SEC. Harmonization for harmonization's sake is not a rational 
basis for agency action.'').
---------------------------------------------------------------------------

    The prime example is the approach we have taken with respect to 
``ANE Transactions.'' \18\ ANE Transactions are swap (or security-
based swap) transactions between two non-U.S. persons that are 
``arranged, negotiated, or executed'' by their personnel or agents 
located in the United States, but booked to entities outside 
America. While some or all of the front-end sales activity takes 
place in the United States, the financial risk of the transactions 
resides overseas.
---------------------------------------------------------------------------

    \18\ See SEC, Proposed Rule Amendments and Guidance Addressing 
Cross-Border Application of Certain Security-Based Swap 
Requirements, 84 FR 24206 (May 24, 2019), available at: https://www.govinfo.gov/content/pkg/FR-2019-05-24/pdf/2019-10016.pdf.
---------------------------------------------------------------------------

    Here, key differences in the markets for swaps and security-
based swaps are dispositive. The swaps market is far more global 
than the security-based swaps market is. While commodities such as 
gold and oil are traded throughout the world, equity and debt 
securities trade predominantly in the jurisdictions where they were 
issued. For this reason, security-based swaps are inextricably tied 
to the underlying security, and vice versa. This is particularly the 
case with a single-name credit default swap. The arranging, 
negotiating, or execution of this kind of security-based swap is 
typically done in the United States because the underlying reference 
entity is a U.S. company. Because security-based swaps can affect 
the price and liquidity of the underlying security, the SEC has a 
legitimate interest in requiring these transactions to be reported. 
By contrast, because commodities are traded throughout the world, 
there is less need for the CFTC to apply its swaps rules to ANE 
Transactions.\19\
---------------------------------------------------------------------------

    \19\ Under the proposal, persons engaging in any aspect of swap 
transactions within the United States remain subject to the CEA and 
Commission regulations prohibiting the employment, or attempted 
employment, of manipulative, fraudulent, or deceptive devices, such 
as section 6(c)(1) of the CEA (7 U.S.C. 9(1)) and Commission 
regulation 180.1 (17 CFR 180.1). The Commission thus would retain 
anti-fraud and anti-manipulation authority, and would continue to 
monitor the trading practices of non-U.S. persons that occur within 
the territory of the United States in order to enforce a high 
standard of customer protection and market integrity. Even where a 
swap is entered into by two non-U.S. persons, we have a significant 
interest in deterring fraudulent or manipulative conduct occurring 
within our borders, and we cannot let our country be a haven for 
such activity.
---------------------------------------------------------------------------

    In addition, as noted above, Congress directed the CFTC to 
regulate foreign swaps activities outside the United States that 
have a ``direct and significant'' connection to our financial 
system. Congress did not give a similar mandate to the SEC. As a 
result of its different mandate, the SEC has not crafted its cross-
border rule to extend to an SRS engaged in swap dealing activity 
offshore that may pose a systemic risk to our financial system. Our 
proposed rule does, aiming to protect American taxpayers from 
another Enron conducting its swaps activities through a major 
foreign subsidiary.\20\
---------------------------------------------------------------------------

    \20\ The SEC's cross-border rule would, however, appear to 
extend to a foreign-to-foreign transaction not involving the 
arranging, negotiation, or execution of the trade in the United 
States if the transaction involved an SEC-registered broker-dealer.
---------------------------------------------------------------------------

Conclusion

    In sum, the proposed rule before us today represents a critical 
step toward finalizing the regulations Congress asked of us nearly a 
decade ago. I believe our proposal is also a sensible and principled 
approach to addressing when foreign transactions should fall within 
the CFTC's swaps registration and related requirements.
    Perhaps President Eisenhower said it best: ``The world must 
learn to work together, or finally it will not work at all.'' \21\ 
My sincere hope is that our domestic and international counterparts 
will view this proposal as a concrete step toward working together 
to provide sound regulation to the global swaps market.
---------------------------------------------------------------------------

    \21\ Transcript of President Dwight D. Eisenhower's Farewell 
Address (1961), available at: https://www.ourdocuments.gov/doc.php;?flash=true&doc=90&page=transcript.
---------------------------------------------------------------------------

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    I am very pleased to support today's proposed rule, which, in my 
view, delineates important boundaries of the Commission's regulation 
of swaps activity conducted abroad, which would codify elements of 
the Commission's 2013 interpretive guidance,\1\ and make important 
adjustments with the benefit of six years' additional experience in 
swaps market oversight.
---------------------------------------------------------------------------

    \1\ Interpretive Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 
2013).
---------------------------------------------------------------------------

Direct AND Significant

    As I have said before, the foundational principle underlying any 
CFTC regulation of cross-border swaps activity, and the prism 
through which all extraterritorial reach by the CFTC must be viewed, 
is the statutory directive from Congress that the agency may only 
regulate those activities outside the United States that ``have a 
direct and

[[Page 1008]]

significant connection with activities in, or effect on commerce of, 
the United States.'' \2\ Congress deliberately placed a clear and 
strong limitation on the CFTC's extraterritorial reach, recognizing 
the need for international comity and deference in a global swaps 
market.
---------------------------------------------------------------------------

    \2\ Sec. 2(i) of the Commodity Exchange Act (CEA).
---------------------------------------------------------------------------

    I believe the proposal strikes a strong balance in interpreting 
Section 2(i) of the CEA. The proposal before us would interpret this 
provision in ways that both provide important safeguards to the U.S. 
financial markets, and avoid duplicative regulation or 
disadvantaging U.S. commercial and financial institutions acting in 
foreign markets.

Registration

    The proposal would require a foreign institution dealing in 
swaps to count the notional value of the swaps it executes towards 
the CFTC's recently finalized $8 billion registration threshold \3\ 
only in certain, enumerated circumstances that clearly concern U.S. 
institutions and implicate risk to the U.S. financial system when 
that risk is not otherwise addressed by the Commission or by the 
banking regulators.\4\ I would like to highlight a few of these 
circumstances.
---------------------------------------------------------------------------

    \3\ CFTC regulation 1.3 (definition of swap dealer, paragraph 
(4)), promulgated by De Minimis Exception to the SD Definition, 83 
FR 56666 (Nov. 13, 2018) (final rule).
    \4\ Proposed CFTC regulation 23.23(b).
---------------------------------------------------------------------------

    First, a foreign swap dealing firm would generally be required 
to count swaps executed opposite a ``U.S. person.'' \5\ I believe 
the proposed definition of U.S. person \6\ is an improvement upon 
the one included in the 2013 guidance.\7\ The proposed definition of 
U.S. person is also consistent with the one published by the SEC in 
connection with that agency's oversight over security-based SDs and 
MSPs.\8\ Only in Washington could two financial regulators have 
different definitions of a U.S. Person. Such a harmonized 
definition, if finalized, will facilitate compliance with the CFTC's 
and SEC's swaps regulations by dually registered entities. The 
proposed definition is largely similar to the definition of U.S. 
person issued by the Commission in 2016 in connection with the rule 
for cross-border applicability of the margin requirements for 
uncleared swaps,\9\ and more streamlined than the one included with 
the Commission's 2013 cross-border guidance, for example in the 
context of investment funds. This will make it easier for market 
participants readily to determine their status. One element of the 
definition that I would like to highlight, an element that is 
consistent with the SEC's rule, is that an investment fund would be 
considered a U.S. person if the fund's primary manager is located in 
the U.S.\10\ (proposed 23.23(a)(22)(ii)).
---------------------------------------------------------------------------

    \5\ Proposed 23.23(b)(1).
    \6\ Proposed 23.23(a)(22).
    \7\ Interpretive Guidance, 45,316-317.
    \8\ Securities and Exchange Act rule 3a71-3(a)(3)(ii) & (4)(iv), 
promulgated by Application of ``Security-Based Swap Dealer'' and 
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, 79 FR 47278, 47313 (Aug. 12, 
2014).
    \9\ CFTC regulation 23.160(a)(10), promulgated by Margin 
Requirements for Uncleared Swaps for SDs and MSPs--Cross-Border 
Application of the Margin Requirements, 81 FR 34818 (May 31, 2016).
    \10\ Proposed 23.23(a)(22)(ii).
---------------------------------------------------------------------------

    In addition to counting swaps opposite a U.S. person, a foreign 
firm would also be required to count swaps executed opposite a non-
U.S. entity, if that firm's obligations under the swap are 
``guaranteed'' by a U.S. person, or if the counterparty's 
obligations are U.S.-guaranteed.\11\ Here too, the proposal provides 
a simpler, more targeted definition of guarantee \12\ than the one 
published in the 2013 guidance,\13\ and the definition is consistent 
with the one included in the Commission's cross-border rule for 
uncleared swap margining.\14\ The definition would include an 
arrangement under which a party to a swap has rights of recourse 
against a guarantor, including traditional guarantees of payment or 
performance, but it would not include other financial arrangements 
or structures such as ``keepwells and liquidity puts'' or master 
trust agreements.
---------------------------------------------------------------------------

    \11\ Proposed 23.23(b)(2)(ii) and (iii).
    \12\ Proposed 23.23(a)(8).
    \13\ Interpretive Guidance, 45,318-20.
    \14\ 23.160(a)(2).
---------------------------------------------------------------------------

    Notably, if a non-U.S. firm's obligations to a swap are 
guaranteed by a non-financial U.S. entity (meaning a U.S. commercial 
end-user), then that swap would be excluded from the foreign 
dealer's tally towards possible CFTC registration.\15\ Commercial 
end-users typically enter into swaps for hedging purposes, and their 
swaps generally pose less risk to the financial system than swaps by 
financial institutions. The fact that a foreign dealer would not be 
required to count a swap with a U.S.-guaranteed commercial end-user 
towards the dealer's possible CFTC registration may give foreign 
subsidiaries of U.S. commercial firms a greater choice of swap 
dealers. This flexibility is consistent with Congress' decision not 
to apply to commercial end-users either the requirement that certain 
swaps be cleared at a derivatives clearing organization (DCO) 
(``swap clearing requirement'') or that uncleared swaps be subject 
to margin requirements.\16\
---------------------------------------------------------------------------

    \15\ Proposed 23.23(b)(2)(iii)(2).
    \16\ Secs. 2(h)(1) and 4s(e) of the CEA, implemented by parts 50 
and 23 subpart E of the Commission's regulations.
---------------------------------------------------------------------------

    I would also like to highlight that the proposal properly does 
not require a foreign dealer to count towards the CFTC's 
registration threshold a swap opposite a foreign branch of a U.S. 
institution already registered with the CFTC as an SD.\17\ While a 
U.S. SD of course stands behind a swap executed by its foreign 
branch, I believe it makes sense for the Commission not to require a 
foreign dealer to count that swap towards the foreign dealer's tally 
for possible CFTC registration because the CFTC is already 
overseeing the U.S. firm, and its swaps, due to the U.S. firm's SD 
registration.
---------------------------------------------------------------------------

    \17\ Proposed 23.23(b)(2)(i).
---------------------------------------------------------------------------

FCS--Not ``Significant'' on Accounting Consolidation Alone

    Today's proposal makes an important, and appropriate, 
distinction from the Commission's 2016 proposal on the cross-border 
application of the SD registration threshold and SD business conduct 
standards.\18\ That proposal would have required thousands of non-
U.S. firms to count all of their dealing swaps, with U.S. and non-
U.S. counterparties alike, towards possible CFTC SD registration. 
For instance, the 2016 proposed rule would have required every 
foreign subsidiary of a U.S. firm that, for accounting purposes, 
consolidates its financial statements into its parent, (referred to 
as a ``foreign consolidated subsidiary'') to count all of its 
swaps.\19\ While an accounting link between a foreign subsidiary and 
its U.S. parent may have satisfied the ``direct'' connection to U.S. 
activities under CEA 2(i), an accounting link alone is meaningless 
in terms of the 2(i) ``significant'' connection to commerce of the 
U.S.
---------------------------------------------------------------------------

    \18\ Cross-Border Application of the Registration Thresholds and 
External Business Conduct Standards Applicable to SDs and MSPs, 81 
FR 71946 (Oct. 18, 2016) (proposed rule).
    \19\ 2016 proposed regulations 1.3(ggg)(7) and 1.3(aaaaa).
---------------------------------------------------------------------------

    By contrast, today's proposal creates a sensible 
``significance'' test for a foreign subsidiary of a U.S. firm 
through the classification of a ``significant risk subsidiary,'' 
which would be required to count every dealing swap towards possible 
CFTC SD registration.\20\ The proposed significant risk subsidiary 
class targets only a foreign entity that may present major risk to a 
large U.S. institution and appropriately scopes out the limits of 
Section 2(i) of the CEA.\21\ Moreover, a significant risk subsidiary 
does not include an entity already subject to supervision either by 
the Federal Reserve Board or by a foreign banking regulator 
operating under Basel standards in a jurisdiction that the 
Commission determined has instituted a margining regime for 
uncleared swaps that is comparable to the Commission's framework for 
margining uncleared swaps.\22\ This construct makes sense. The 
Federal Reserve already reviews swaps activity by foreign 
subsidiaries of bank holding companies.\23\ Additionally, the CFTC

[[Page 1009]]

has already found multiple jurisdictions' uncleared margin regimes 
comparable to ours. In order to eliminate duplicative regulation, 
and for the sake of international comity and respect for foreign 
jurisdictions' sovereignty, it is prudent for the Commission to rely 
on other authorities, either the Federal Reserve or its counterparts 
in comparable jurisdictions, to supervise the swaps entered into by 
non-U.S. subsidiaries of the banks they supervise on a consolidated 
basis.
---------------------------------------------------------------------------

    \20\ Proposed 23.23(a)(12) and 23.23(b)(1).
    \21\ In order to be a significant risk subsidiary, the U.S. 
parent must have at least $50 billion in global consolidated assets, 
and the subsidiary must exceed one of three thresholds (measured 
according to a percentage of capital, revenue, or assets) as 
compared to its parent (proposed 23.23(a)(12)-(13)). The proposed 
definition of ``significant subsidiary'' is consistent with the 
definition of this term included in SEC Regulation S-X (17 CFR 
210.1-01(w)).
    \22\ Proposed 23.23(a)(12)(i)-(ii). To date, the Commission has 
determined Australia, the E.U., and Japan to have issued margining 
regimes for uncleared swaps comparable to the Commission's (82 FR 
48394 (Oct. 18, 2017 (E.U.); 84 FR 12908 (Apr. 3, 2019) (Australia); 
and 84 FR 12074 (Apr. 1, 2019) (Japan)).
    \23\ Federal Reserve Board, Bank Holding Co. Supervision Manual, 
sec. 2100.0.1 Foreign Operations of U.S. Banking Organizations, 
available at, https://www.federalreserve.gov/publications/files/bhc.pdf.
---------------------------------------------------------------------------

    By limiting the number of foreign firms registered with the CFTC 
as SDs, I believe the Commission, together with the National Futures 
Association (NFA), will best apply the agency's limited resources to 
the non-U.S. entities outside of the Federal Reserve's purview, 
especially given that there are already over 100 registered SDs 
organized in more than 10 countries.\24\
---------------------------------------------------------------------------

    \24\ List of SDs available on the CFTC's website at, https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html.
---------------------------------------------------------------------------

Business Conduct Requirements

    In addition to setting boundaries in the area of non-U.S. firms 
counting swaps towards possible CFTC registration, today's proposal 
would build on the 2013 guidance by providing certainty regarding 
when a non-U.S. firm, which is registered with the CFTC as an SD, 
must comply with the Commission's SD standards. Again, importantly 
and appropriately out of respect for foreign jurisdictions, the 
proposal would exempt swaps executed with certain counterparties 
located abroad and make available compliance with local rules that 
the CFTC has determined comparable to its own (``substituted 
compliance'').\25\ The proposed rule also sets forth exemptions and 
substituted compliance for foreign branches of U.S. financial 
institutions registered as SDs with the CFTC.\26\ As in 2013, the 
Commission believes that certain of the Commission's SD rules, or 
comparable foreign rules, should apply to every registered SD, 
including one organized in a foreign jurisdiction, with respect to 
all of the dealer's swaps, namely requirements concerning: A Chief 
Compliance Officer; a risk management program, including special 
rules for when the SD is a member of a DCO; addressing conflicts of 
interest and antitrust considerations; recordkeeping; disclosing 
information to the CFTC and banking regulators; and position limits 
monitoring (collectively, the ``Group A requirements'').\27\ I note 
that substituted compliance is currently available for particular 
Group A requirements for SDs established in, and operating out of, 
Australia, Canada, the E.U., Hong Kong, Japan, and Switzerland.\28\
    With regard to other SD requirements, namely daily trading 
records, confirmations, documentation, and portfolio reconciliation 
and compression (collectively, the ``Group B requirements''),\29\ 
today's proposal reasonably exempts foreign firms registered with 
the Commission as SDs, as well as foreign branches of U.S. 
registered as SDs, from these requirements for swaps with certain 
counterparties located outside of the U.S., including those non-U.S. 
counterparties whose swap obligations are not guaranteed by a U.S. 
person and those foreign counterparties not covered by the proposed 
definition of significant risk subsidiary.\30\ As with the 2013 
guidance, substituted compliance is also available.\31\ Finally, 
under today's proposal, both a non-U.S. firm registered with the 
Commission as an SD, and the foreign branch of a U.S. firm 
registered as an SD, would only be required to comply with a set of 
business conduct requirements, those addressing how registered SDs 
transact with certain counterparties (collectively, the ``Group C 
requirements''),\32\ for swaps with U.S. counterparties, but not 
with non-U.S. counterparties.\33\
---------------------------------------------------------------------------

    \25\ Proposed 23.23(e)-(f).
    \26\ Id.
    \27\ CFTC regulations 3.3, 23.201, 23.203, 23.600-607, and 
23.609 (referred to by the Proposal as the ``Group A requirements'' 
(proposed 23.23(a)(5) and 23.23(e)-(f)). ``Entity-level'' 
comparability determinations, available at, https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
    \28\ ``Entity-level'' comparability determinations, available 
at, https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
    \29\ CFTC regulations 23.202 and 501-504 (referred to by the 
Proposal as the ``Group B requirements (proposed 23.23(a)(6)).
    \30\ Proposed 23.23(e)(2).
    \31\ Proposed 23.23(f)(2). Currently, substituted compliance for 
certain Group B requirements is available for SDs organized in the 
E.U. and in Japan. These comparability determinations are available 
at, https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
    \32\ CFTC regulations 23.400-451 (referred to by the proposal as 
the Group C requirements (proposed 23.23.(a)(7)).
    \33\ Proposed 23.23(e)(1)(ii).
---------------------------------------------------------------------------

``ANE''--Eliminating the ``Elevator Test''

    Today's proposal makes an important distinction from how the 
Commission's Division of Swap Dealer and Intermediary Oversight 
(DSIO) addressed compliance with ``transaction-level requirements'' 
(referred to in today's proposal as Groups B and C requirements) in 
2013. A November 2013 DSIO Advisory \34\ suggested that a foreign 
CFTC-registered SD must comply with CFTC transaction-level 
requirements even in connection with a swap opposite another non-
U.S. person if the SD used personnel located in the U.S. to 
``arrange,'' ``negotiate'' or ``execute'' (ANE) the swap. Such a 
broad, vague, and burdensome application caused such widespread 
confusion and international condemnation that it was, within 13 days 
of publishing, placed under no-action relief.\35\ That no-action 
relief exists to this day, having been renewed six times.\36\
---------------------------------------------------------------------------

    \34\ CFTC Staff Advisory 13-69 (Nov. 14, 2013).
    \35\ CFTC Letter 13-71 (Nov. 26, 2013).
    \36\ CFTC Letters 14-01, 14-74, 14-140, 15-48, 16-64, and 17-36.
---------------------------------------------------------------------------

    Prudently, today's proposal eliminates the ANE standard. I 
believe the Commission should only consider applying its 
transaction-level requirements to a foreign registered SD when a 
swap is executed opposite a U.S. counterparty.\37\ The fact that the 
foreign SD may be using U.S. personnel to support the transaction 
does not implicate how the swap should be executed with a foreign 
counterparty. Under the limited extra-territorial jurisdiction 
Congress gave to the CFTC in overseeing the swaps market, it is 
appropriate that the Commission refrains from requiring foreign 
firms to comply with the CFTC's SD transaction-level requirements, 
or comparable foreign requirements, for swaps where both 
counterparties are outside of the United States and there is no U.S. 
nexus.
---------------------------------------------------------------------------

    \37\ I note that the proposal also appropriately applies the 
Group B requirements to a swap involving a non-U.S. person that is 
either U.S.-guaranteed or a significant risk subsidiary (proposed 
23.23.(e)(2)).
---------------------------------------------------------------------------

Enhancing Substituted Compliance

    I am pleased that today's proposal codifies a process under 
which the Commission will issue future substituted compliance 
determinations.\38\ Substituted compliance is the lynchpin of a 
global swaps market. Said differently, the absence of regulatory 
deference has been the fracturing sound we hear as the global swaps 
market fragments. The 11 substituted compliance determinations the 
Commission has issued to date for registered SDs, concerning 
business conduct and uncleared swap margining rules, highlight the 
progress other jurisdictions have made in issuing swaps rules. While 
not identical, those rulesets largely address the same topics and 
guard against the same risks. I hope that the Commission will soon 
be in a position to issue additional comparability determinations, 
particularly for Group B requirements. Whereas Group A substituted 
compliance determinations have been issued for six jurisdictions 
(Australia, Canada, the E.U., Hong Kong, Japan, and Switzerland), 
Group B substituted compliance determinations have been issued for 
only two jurisdictions (the E.U. and Japan).
---------------------------------------------------------------------------

    \38\ Proposed 23.23(f).
---------------------------------------------------------------------------

    In conclusion, I am pleased that the Commission is making 
meaningful progress in providing legal certainty to the market with 
regard to complying with the Dodd-Frank swaps regulations on a 
cross-border basis. I hope that the Commission will soon propose 
other cross-border regulations regarding other areas of the CFTC's 
swap regulations, including the swap clearing requirement, the trade 
execution requirement,\39\ and the swaps reporting requirement.\40\
---------------------------------------------------------------------------

    \39\ Sec. 2(h)(8) of the CEA, implemented by CFTC part 37.
    \40\ Secs. 2(a)(13) and 21 of the CEA, implemented by CFTC parts 
43 and 45.
---------------------------------------------------------------------------

    I would like to thank the staff of DSIO for their efforts on 
this proposal, as well as a personal thank you to Matt Daigler from 
the Chairman's office, who worked tirelessly on this proposal and 
its unpublished predecessor and has held countless conversations 
with me and my staff on this issue over the past year.

Appendix 4--Dissenting Statement of Commissioner Rostin Behnam 
Introduction

    I respectfully dissent from the Commodity Futures Trading 
Commission's (the ``Commission'' or ``CFTC'') notice of proposed 
rulemaking addressing the cross-border application of the 
registration

[[Page 1010]]

thresholds and certain requirements applicable to swap dealers 
(``SDs'') and major swap participants (``MSPs'') (the ``Proposal''). 
I support the Commission's effort to make good on its commitment to 
periodically review its approach to evaluating the circumstances 
under which the swaps provisions of Title VII of the Dodd-Frank Act 
\1\ ought to apply to swap dealing and related activities outside 
the United States.\2\ Indeed, the Guidance currently in place and 
Section 2(i) of the Commodity Exchange Act (the ``Act'' or ``CEA'') 
itself provide the Commission the flexibility to evaluate its 
approach on a case-by-case basis, affording interested and affected 
parties the opportunity to present facts and circumstances that 
would inform the Commission's application of the relevant 
substantive Title VII provisions in each circumstance.\3\ Today, the 
Commission, without adequate explanation of its action, 
consideration of alternatives, or deference to the wisdom of the 
United States District Court for the District of Columbia on the 
matter, is proposing to discard both the existing Guidance and the 
use of agency guidance and non-binding policy statements altogether 
in addressing the cross-border reach of its authority in favor of 
hard and fast rules. I simply do not believe the Commission has made 
a strong enough case for wholesale abandonment of guidance at this 
point in the evolution of our global swaps markets, and in light of 
current events that are already impacting market participants and 
their view of the future global swaps landscape. As well, I have 
serious questions and concerns as to what the Commission may give up 
should the Proposal be codified in its current form.
---------------------------------------------------------------------------

    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203 section 712(d), 124 Stat. 1376, 1644 (2010) 
(the ``Dodd-Frank Act'').
    \2\ See Interpretive Guidance and Policy Statement Regarding 
Compliance with Certain Swaps Regulations, 78 FR 45292, 45297 (Jul. 
26, 2013) (the ``Guidance'').
    \3\ Id.
---------------------------------------------------------------------------

    Whereas the Commission understands the scope of our 
jurisdictional reach with respect to Title VII, a federal district 
court has affirmed that understanding, and we have operated within 
such boundaries--aware of the risks and successfully responding in 
kind, the Commission is now making a decision based on the most 
current thinking that we should retreat under a banner of comity and 
focus only on that which can fit on the head of a pin. Oddly enough, 
that pin will hold only the giants of the swaps market. Indeed, 
where our jurisdiction stands on its own, the ability to exercise 
our authority through adjudication \4\ and enforcement has allowed 
the Commission to articulate policy fluidly, refining our approach 
as circumstances change without the risk of running afoul of our 
mandate. Today's Proposal suggests that we can resolve all 
complexities in one fell swoop if we alter our lens, abandon our 
longstanding and literal interpretation of CEA section 2(i), and 
limit ourselves to a purely risk-based approach. I cannot support an 
approach that would limit our jurisdiction and consequently 
oversight directly in conflict with Congressional intent, and 
potentially expose the U.S. to systemic risk.
---------------------------------------------------------------------------

    \4\ See 5 U.S.C. 554.
---------------------------------------------------------------------------

    Throughout the preamble, the Proposal evinces a clear 
understanding that the complexity of swaps markets, transactions, 
corporate structures and market participants create channels through 
which swaps-related risks warrant our attention by meeting the 
jurisdictional nexus described in CEA Section 2(i).\5\ However, in 
many instances, we manage to simply acknowledge the obvious risk and 
step aside in favor of the easier solution of doing nothing, 
assuming that the U.S. prudential regulators will act on our behalf, 
or waving the comity banner. The Proposal provides shorthand 
rationales for each of its decision points without the support of 
data or direct experience as if doing so would reveal the vision's 
vulnerabilities. Perhaps most concerning are the Proposal's 
contracted definitions of ``U.S. person'' and ``guarantee,'' its 
introduction of ``substantial risk subsidiaries,'' and its 
determination that ``ANE'' means something akin to ``absolutely 
nothing to explain'' regarding our jurisdictional interest--even 
when activities are occurring within the territorial United States. 
These represent some notable examples where the Proposal undermines 
the core protections sought to be addressed by section 2(i), as the 
Commission has, until now, understood them to be.
---------------------------------------------------------------------------

    \5\ See, e.g., Proposal at I.B., I.C., II.B, II.C., V, and VII.
---------------------------------------------------------------------------

    My concerns aside for a moment, I am grateful that within the 
four corners of the document, the requests for comment seek to build 
consensus and operatively provide the public an option to maintain 
the status quo with regard to most aspects of the Guidance--albeit 
without sticking with guidance. While this leads me to more 
questions as to whether and how the Proposal could go final absent 
additional intervening process, I am pleased that there is 
recognition that the public and market participants may have lost 
their appetite for this brand of rulemaking or perhaps have come to 
agree with the D.C. District Court that the Commission's decision to 
issue the Guidance benefits market participants.\6\ Further, as the 
Commission currently engages with our foreign counterparts regarding 
impending regulatory matters related to Brexit, I hope we are 
measured in timing and substance on the Proposal.
---------------------------------------------------------------------------

    \6\ See SIFMA v. CFTC, 67 F.Supp.3d 373, 426-427, 429 (D.D.C. 
2014) (finding the CFTC's choice to address extraterritorial 
application of the Title VII Rules incrementally and through the 
Guidance reasonable, ``particularly, where, as here, `the agency may 
not have had sufficient experience with a particular problem to 
warrant rigidifying its tentative judgment into a hard and fast 
rule' and `the problem may be so specialized and varying in nature 
as to be impossible to capture within the boundaries of a general 
rule.' '' (quoting SEC v. Chenery Corp., 332 U.S. 194, 202-203, 67 
S.Ct. 1760, 90 L.Ed 1995(1947))).
---------------------------------------------------------------------------

    Before I highlight certain aspects of the Proposal, I want to 
take a brief moment to acknowledge why--as a general matter--we are 
here, and why this particular proposal is so important. Without 
rehashing market realties that led to the economic devastation of 
2008, it should never be lost on our collective consciousness that a 
significant driving force that exacerbated the financial crisis and 
great recession, at least within the context of the over-the-counter 
derivatives market, was housed overseas. Although much of the risk 
completed its journey within the continental U.S., it was conjured 
up in foreign jurisdictions.\7\ But, as we all also know too well, 
more than 10 years later, despite the products often being 
constructed, sold, and traded overseas, the highly complex web of 
relationships between holding companies, subsidiaries, affiliates, 
and the like, created a perfect storm that brought our financial 
markets to a near halt, and the global economy to a shudder. Those 
experiences should always serve as the foundation from which we 
craft cross-border derivatives policy. Always.
---------------------------------------------------------------------------

    \7\ See Guidance, 78 FR at 45293-5; SIFMA v. CFTC, 67 F.Supp.3d 
at 387-88 (describing the ``several poster children for the 2008 
financial crisis'' that demonstrate the impact that overseas over-
the-counter derivatives swaps trading can have on a U.S. parent 
corporation).
---------------------------------------------------------------------------

Cutting to the Chase on Codification

    Since 2013, when the Commission announced its first cross-border 
approach in flexible guidance as a non-binding policy statement,\8\ 
the Commission has understood that addressing the complex and 
dynamic nature of the global swaps market cannot be described in 
black and white, and that even describing it in shades of gray 
quickly overwhelms our regulatory sensibilities. Cutting through the 
haze with bright line rules for identity, ownership, control, and 
attribution to find comfort in comity seems to be our approach in 
addressing the nature of risk in the global swaps market. However, 
Congress has granted the Commission authority without any attendant 
instruction to engage in rulemaking.\9\ Under such circumstances, 
the Commission must critically evaluate whether a rule-driven 
application of policy amid a global market that is only growing in 
size and in its complexity may prove inadequate as we carry out our 
mandate and protect our domestic interests. It seems in this 
instance that the Commission is barreling toward hard and fast 
comprehensive rules without acknowledging the benefits of what we 
have today.
---------------------------------------------------------------------------

    \8\ See Guidance, 78 FR at 45292.
    \9\ SIFMA v. CFTC, 67 F.Supp.3d at 423-25, 427 (finding that 
Section 2(i) operates independently and provides the CFTC with the 
authority--without implementing regulations--to enforce the Title 
VII Rules extraterritorially); See also, Id. at 427 (``Although many 
provisions in the Dodd-Frank Act explicitly require implementing 
regulations, Section 2(i) does not.'').
---------------------------------------------------------------------------

    To be clear, while I support the Commission's efforts to address 
problems resulting from its current approach to regulating swaps 
activities in the cross-border context, it is not clear to me at 
this moment that we have reached a point where codification would 
provide immediate benefits to either the Commission or the public. 
While the Guidance is complex, it is difficult to say it is any more 
complex than the Proposal. The complexity is and will be inherent to 
whatever action we take as it,

[[Page 1011]]

``merely reflects the complexity of swaps markets, swaps 
transactions, and the corporate structures of the market 
participants that the CFTC regulates.'' \10\ It is this type of 
complexity that supported the Commission's initial determination to 
issue the Guidance, and to my knowledge, such determination has not 
hindered the Commission's ability to pursue enforcement actions that 
apply Title VII extraterritorially \11\ or to participate in 
discourse with and decision-making among our fellow international 
financial regulators.
---------------------------------------------------------------------------

    \10\ Id. at 419-20 (``Indeed, the complexity of a regulatory 
issue is one reason an agency might choose to issue a non-binding 
policy statement rather than a rigid `hard and fast rule.' '' 
(citing SEC v. Chenery Corp., 332 U.S. 194, 202-203, 67 S.Ct. 1760, 
90 L.Ed 1995(1947))).
    \11\ See, e.g., SIFMA v. CFTC, 67 F.Supp.3d at 421, (``Indeed, 
even after promulgating the Cross-Border Action, the CFTC has relied 
solely on its statutory authority in Section 2(i) when bringing 
enforcement actions that apply to Title VII Rules 
extraterritorially.'').
---------------------------------------------------------------------------

CEA Section 2(i) Preservation

    As recognized by the D.C. District Court, the Title VII 
statutory and regulatory requirements apply extraterritorially 
through the independent operation of CEA section 2(i), which the 
CFTC is charged with enforcing.\12\ Congress did not direct--and has 
not since directed--the Commission to issue rules or even guidance 
regarding its intended enforcement policies pursuant to CEA section 
2(i). To the extent the CFTC interpreted Section 2(i) in the 
Guidance, an interpretation carried forward in the Proposal, such 
interpretation is drawn linguistically from the statute; its 
interpretation has not substantively changed the regulatory 
reach.\13\ Putting aside the anti-evasion prong in CEA section 
2(i)(2), it remains that the Commission construes CEA section 2(i) 
to apply the swaps provisions of the CEA to activities, viewed in 
the class or aggregate, outside the United States that, meet either 
of two jurisdictional nexus: (1) A direct and significant effect on 
U.S. commerce; or (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.\14\ Accordingly, to 
any extent the Commission is moving away from guidance towards 
substantive rulemaking, it must preserve that interpretation.
---------------------------------------------------------------------------

    \12\ SIFMA v. CFTC, supra note 9.
    \13\ SIFMA v. CFTC, 67 F.Supp.3d at 424.
    \14\ See Proposal at C.1.; Guidance, 78 FR at 45292, 45300; see 
also SIFMA v. CFTC, 67 F.Supp.3d at 424-5.
---------------------------------------------------------------------------

    As I read the Proposal--which purports to reflect the 
Commission's current views \15\--I cannot help but notice that our 
``risk-based approach'' seems to focus on individual entities that 
present a particular category of significant risk--the giants among 
global swap market participants-- and ignores smaller pockets of 
risk that, in the aggregate, may ultimately raise systemic risk 
concerns.\16\ What is lacking is any discussion of how our laser 
focus on individual corporate families and their ability to 
singularly impact systemic risk to the U.S. financial system 
adequately ensures that we are not disregarding the potential for 
similar swap dealing activities of groups of market participants, 
regardless of individual size, and in the aggregate, present a 
similar risk profile, or at the least a risk profile worth 
monitoring. Perhaps more troubling, the Proposal is focused largely 
on the threshold matter of swap dealer registration requirements. 
However, as the Commission has acknowledged, ``Neither the statutory 
definition of `swap dealer' nor the Commission's further definition 
of that term turns solely on risk to the U.S. financial system.'' 
\17\ And to that end, ``[T]he Commission does not believe that the 
location of counterparty credit risk associated with a dealing 
swap--which . . . is easily and often frequently moved across the 
globe--should be determinative of whether a person's dealing 
activity falls within the scope of the Dodd-Frank Act.'' \18\
---------------------------------------------------------------------------

    \15\ Proposal at I.A.
    \16\ The Commission proposes to limit its supervisory oversight 
outside the United States, ``only as necessary to address risk to 
the resiliency and integrity of the U.S. financial system.'' 
Proposal at I.D. (emphasis supplied).
    \17\ Cross-Border Application of the Registration Thresholds and 
External Business Conduct Standards Applicable to Swap Dealers and 
Major Swap Participants, 81 FR 71946, 71952 (Oct. 18, 2016) (``2016 
Proposal'').
    \18\ Id.
---------------------------------------------------------------------------

    I also cannot help but notice the Proposal seems to frequently 
reference ``comity'' without providing supporting rationales for 
deferring to our fellow domestic regulators and foreign counterparts 
or for providing per se exemptions. I support working closely with 
foreign regulators to address potential conflicts with respect to 
each of our respective regulatory regimes, and I believe that our 
cross-border approach must absolutely align with principles of 
international comity. But, I do not understand how we can reach 
regulatory absolutes and conclusions based on comity, absent a 
finding that the exercise of our authority under CEA section 2(i) 
would be patently unreasonable under international principles. I 
believe that substituted compliance is generally the most workable 
and respectful solution, and I believe we must engage with our 
fellow global regulators to address matters of risk that may impact 
each of our jurisdictions regardless of size and nature.

Contraction Justifies Inaction--``U.S. Persons'' and ``Guarantees''

    The bulk of the Proposal is dedicated to codifying 23 
definitions ``key'' to determining whether certain swaps or swap 
positions would need to be counted towards a person's SD or MSP 
threshold and in addressing the cross-border application of the 
Title VII requirements. While most of the defined terms are familiar 
from the Guidance, there are some differences that stand out as more 
than a simple exercise in conformity. For example, the preamble of 
the Proposal describes the proposed definition of ``U.S. person'' as 
``largely consistent with'' and the definition of ``guarantee'' as 
``consistent with'' the Commission's Cross-Border Margin Rule.\19\ 
However, both represent a narrowing in scope from the current 
Guidance, and in turn, may potentially retract our authority under 
CEA Section 2(i) with respect to swap dealing activities relevant to 
swap dealer registration and oversight.
---------------------------------------------------------------------------

    \19\ 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).
---------------------------------------------------------------------------

    With regard to ``U.S. persons,'' the definition harmonizes with 
the definition adopted by the Securities and Exchange Commission 
(``SEC'') in the context of its regulations regarding cross-border 
security-based swap activities, which largely encompasses the same 
universe of persons as the Commission's Cross-Border Margin Rule. 
However, among other things, the proposed ``U.S. person'' 
definition, unlike the Cross Border Margin Rule, would not include 
certain legal entities that are owned by one or more U.S. person(s) 
and for which such person(s) bear unlimited responsibility for the 
obligations and liabilities of the legal entity (``unlimited U.S. 
responsibility prong'').\20\ In support of its decision, the 
Commission puts forth what almost reads as an incomplete syllogism 
that fatally fails to address how such relationships may satisfy the 
jurisdictional nexus laid out in CEA section 2(i). After noting (1) 
that the SEC does not include an unlimited U.S. responsibility prong 
because it considers this type of arrangement as a guarantee, and 
(2) that when considering the issue in the context of the Cross-
Border Margin rule, the Commission does not view the unlimited U.S. 
responsibility prong as equivalent to a U.S. guarantee, the Proposal 
states that (3) the Commission is not revisiting its interpretation 
of ``guarantee'' and is not including an unlimited U.S. 
responsibility prong in the ``U.S. person'' definition because it 
``is of the view that the corporate structure that this prong is 
designed to capture is not one that is commonly used in the 
marketplace.'' \21\
---------------------------------------------------------------------------

    \20\ Proposal at II.A.
    \21\ Proposal at II.A.
---------------------------------------------------------------------------

    To be clear, the Guidance includes an unlimited U.S. 
responsibility prong in its interpretation of ``U.S. persons'' for 
purposes of applying CEA section 2(i) that is intended to cover 
entities that are directly or indirectly owned by U.S. person(s) 
such that the U.S. owner(s) are ultimately liable for the entity's 
obligations and liabilities.\22\ Among other things, where this 
relationship exists, the Commission's stated view is that, ``[W]here 
the structure of an entity is such that the U.S. owners are 
ultimately liable for the entity's obligations and liabilities, the 
connection to activities in, or effect on, U.S. Commerce would 
generally satisfy section 2(i) . . . '' \23\
---------------------------------------------------------------------------

    \22\ See Proposal at II.A.; Guidance, 78 FR at 45312-13.
    \23\ Guidance, 78 FR at 45312.
---------------------------------------------------------------------------

    While I am not arguing that the Commission cannot change its 
views regarding the necessity for including a U.S. responsibility 
prong in a proposed ``U.S. person'' definition, I do believe that if 
we do

[[Page 1012]]

so, we must articulate a rationale relevant to the particular 
context at issue and explain why our past reasoning with regard to 
the jurisdictional nexus is no longer valid.
    More concerning, the proposed ``guarantee'' definition is 
narrower in scope than the one used in the Guidance in that it would 
not include several different financial arrangements and structures 
that transfer risk directly back to the United States such as 
keepwells and liquidity puts, certain types of indemnity agreements, 
master trust agreements, liability or loss transfer or sharing 
agreements, etc.\24\ While in this instance, the Proposal explains 
the Commission's rationale for the broader interpretation of 
``guarantee'' for purposes of CEA section 2(i) in the Guidance, and 
admits that the rationale is still valid, it nevertheless chooses to 
ignore the truth of the matter and focus on what is more 
``workable'' for non-U.S. persons.\25\ Further concerning, as I will 
explain shortly, the Proposal puts forth that while the proposed 
``guarantee'' definition could lead to entities counting fewer swaps 
towards their de minimis threshold calculation relevant to SD 
registration as compared to the Guidance, related concerns could be 
mitigated to the extent such non-U.S. person meets the definition of 
a ``significant risk subsidiary.'' \26\ In this instance, the 
Commission is simply ignoring its responsibilities under CEA section 
2(i) to save non-U.S. persons a little extra work, or as the 
Proposal might say, ``overly burdensome due diligence.'' \27\
---------------------------------------------------------------------------

    \24\ Proposal at II.B; See Guidance 78 FR at 45320, n. 267.
    \25\ Id.
    \26\ Id.
    \27\ Proposal at II.
---------------------------------------------------------------------------

SOS on SRS

    The introduction of the ``significant risk subsidiary'' or 
``SRS'' is perhaps the most elaborate departure from the 
Commission's interpretation of CEA section 2(i) and almost seems to 
be an attempt to ensure that no non-U.S. subsidiary of a U.S. parent 
entity will ever have to consider its swap dealing activities for 
purposes of the relevant SD or MSP registration threshold 
calculations. Save for a single footnote reference to a request for 
comment and passing references to SRSs likely being classified as 
conduits in the explanation of Cost-Benefit Considerations, the 
Proposal does not mention anything regarding the Guidance's concept 
of a conduit affiliate--despite the fact that the SEC includes the 
concept of conduit affiliate in its definitions relevant to cross-
border security-based swap dealing activity.\28\ Rather, instead of 
elaborating on whether and how the concept of conduit affiliates 
described in the Guidance failed to achieve its purpose, is no 
longer relevant, resulted in loss of liquidity, fragmentation, 
proved unworkable, etc., or should be deleted from all frame of 
reference in favor of harmonizing with the SEC, the Proposal simply 
introduces the SRS as a new category of person and walks through an 
elaborate analysis that really begins where it ends--an exclusion. 
It is a policy decision of the worst ilk because it masquerades as a 
solution by diminishing the problem.
---------------------------------------------------------------------------

    \28\ See 17 CFR 240.3a71-3(a)(1).
---------------------------------------------------------------------------

    SRSs represent a tiny subset of the consolidated non-U.S. 
subsidiaries of U.S. parent entities that the Commission believes 
are of supervisory interest in light of their clear potential to 
permit U.S. persons to accrue risk that, in the aggregate, may have 
a significant effect on the U.S. financial system or may otherwise 
be used for evasion.\29\ The Proposal's stated rationale for 
targeting only a subset of non-U.S. subsidiary relationship focuses 
on comity and the application of a risk-based approach acts like a 
sieve on CEA section 2(i) such that only the largest entities that 
themselves as individual entities may pose risk to the financial 
system. An approach that outright acknowledges the potential for 
widespread swap activities within the scope of CEA section 2(i), 
which could ultimately result in significant risk being transferred 
back to U.S. parent entities, only to be met with a bright line 
induced shrug by the Commission--is simply untenable.
---------------------------------------------------------------------------

    \29\ Proposal at II.C.1.
---------------------------------------------------------------------------

    Rather than rehashing the elements of the SRS definition, I will 
focus on two aspects that I find most troubling. First is the 
requirement that the U.S. parent entity meet a $50 billion 
consolidated asset threshold. This threshold is intended to limit 
the SRS definition to only those entities whose U.S. parent entity 
may pose a systemic risk to the U.S. financial system. Foremost, 
given CEA section 2(i)'s focus on activities in the aggregate, a 
bright line threshold at the entity level is irrelevant. Not to 
mention that if Congress had wanted the Commission to focus its 
cross-border authority on systemically significant entities, it 
would have used language that was not so embedded in common law \30\ 
or would have articulated that directive clearly in the Dodd-Frank 
Act.\31\
---------------------------------------------------------------------------

    \30\ See, e.g. Proposal at I.C.1.; Guidance 81 FR at 45298-300; 
See SIFMA v. CFTC, 67 F.Supp.3d at 427 (``Congress modeled Section 
2(i) on other statutes with extraterritorial reach that operate 
without implementing regulations.'' (citations omitted); See Larry 
M. Eig, Cong. Research Serv., 97-589, Statutory Interpretation: 
General Principles and Recent Trends 20 (2014) (Congress is presumed 
to legislate with knowledge of existing common law.'').
    \31\ Id. at 16-17 (``where Congress includes particular language 
in one section of a statute but omits it in another . . ., it is 
generally presumed that Congress acts intentionally and purposely in 
the disparate inclusion or exclusion.'' (quoting Atlantic Cleaners & 
Dyers, Inc. v. United States, 286 U.S. 427, 433 (1933))).
---------------------------------------------------------------------------

    Second, even if a non-U.S. person met one of three tests for 
being a significant subsidiary of a U.S. parent with over $50 
billion in consolidated assets, it would not be an SRS if it is 
either subject to prudential regulation as a subsidiary of a U.S. 
bank holding company or subject to comparable capital and margin 
standards and oversight by its home country supervisor. While I 
believe these exclusions are appropriate in the context of the 
policy the Proposal is putting forward in its vision of the SRS, I 
am concerned that we are substituting our oversight with that of the 
Federal Reserve Board, in one instance, on the grounds that being 
subject to consolidated supervision and regulation by the Federal 
Reserve Board with respect to capital and risk management 
requirements provides appropriate regulatory coverage. While I do 
not disagree with respect to risk management that the Federal 
Reserve Board provides comparable oversight, finding that 
comparability satisfies our regulatory oversight concerns in this 
instance may lead us down a slippery slope in which we find 
ourselves fighting to maintain our own Congressionally delegated 
jurisdiction with respect to swaps activities. This fact is only 
further validated-- considering the breadth of the exclusions--by 
the high likelihood that a non-U.S. subsidiary of a U.S. parent 
entity with over $50 billion in consolidated assets is a financial 
entity subject to some form or prudential regulation in its home 
jurisdiction. Indeed, the Proposal suggests that of the current 
population of 59 SDs, ``few, if any, would be classified as SRSs.'' 
\32\
---------------------------------------------------------------------------

    \32\ Proposal at VII.C.2.i.
---------------------------------------------------------------------------

    While the concept of an SRS is interesting to me, the Proposal's 
attempt to draw multiple bright lines in a web of interconnectedness 
almost ensures that risk will find an alternate route back to the 
U.S. with potentially disastrous results. Without a better 
understanding of how the SRS proposal would work in practice and 
whether it is truly better than the conduit affiliate concept 
currently outlined in the Guidance and presumably similar to the 
SEC's own approach, it is difficult to get behind a policy that 
could most certainly bring risk into the U.S. of the very type CEA 
Section 2(i) seeks to address.

ANE--Anyone? Anyone?

    The issue of how to address the application of certain 
transaction-level requirements with respect to swap transactions 
arranged, negotiated, or executed by personnel or agents located in 
the United States of non-U.S. SDs (whether affiliates or not of a 
U.S person) with non-U.S. counterparties (``ANE Transactions'') is 
one aspect of the Commission's cross-border approach that has 
continually raised concerns and demands greater certainty. First 
articulated in a 2013 Staff Advisory,\33\ the issue boils down to 
whether transactional requirements apply to ANE swaps, and if so, 
whether substituted compliance may be available. A 2014 Commission 
Request for Comment \34\ sought to address the complex legal and 
policy issues raised by the 2013 Staff Advisory. It was followed by 
the Commission's 2016 Proposal, which among other things, addressed 
ANE transactions, including the types of activities that would 
constitute arranging, negotiating, and executing within the context 
of the 2016 Proposal, and the

[[Page 1013]]

extent to which the SD registration threshold and external business 
conduct standards apply with respect to ANE Transactions.\35\ 
Today's Proposal withdraws the 2016 Proposal on grounds that the 
Commission's views have changed and evolved as a result of market 
and regulatory developments and ``in the interest of international 
comity.'' \36\
---------------------------------------------------------------------------

    \33\ See CFTC Staff Advisory No. 13-69, Applicability of 
Transaction-Level Requirements to Activity in the United States 
(Nov. 14, 2013), http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.
    \34\ See 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 (Jan. 8, 2014) 
(``2014 Request for Comment'').
    \35\ See Cross-Border Application of the Registration Thresholds 
and External Business Conduct Standards Applicable to Swap Dealers 
and Major Swap Participants, 81 FR 71946 (Oct. 18, 2016).
    \36\ Proposal at I.A.
---------------------------------------------------------------------------

    The proposal sets forth an approach largely based on comments to 
the 2014 Request for Comment \37\ and seemingly in response to a 
recommendation made in an October 2017 report of the U.S. Treasury 
Department that both the CFTC and SEC ``reconsider the implications 
of applying their Title VII rules to transactions between non-U.S. 
firms or between a non-U.S. firm and a foreign branch or affiliate 
of a U.S. firm merely on the basis that U.S. located personnel 
arrange, negotiate, or execute the swap, especially for entities in 
comparably regulated jurisdictions.'' \38\ The proposed approach is 
simply to ignore ANE Transactions within the scope of the Proposal 
as irrelevant ``because the transactions involve two non-U.S. 
counterparties, and the financial risk of the transactions lies 
outside the United States . . .'' \39\ That may be the case in some 
circumstances; however, casting an overly broad net on a category of 
activities may run the risk of slippage, and I am concerned we have 
not given this important element of our cross-border jurisdiction 
enough thought to warrant such an expeditious solution.
---------------------------------------------------------------------------

    \37\ Indeed, the discussion of the seventeen comments to the 
2014 Request for Comment in the 2016 Proposal is nearly identical to 
that of the Proposal. See, 2016 Proposal, 81 FR at 71946, 71952-3; 
Proposal at V.
    \38\ See U.S. Dep't of the Treasury, A Financial System that 
Creates Economic Opportunities: Capital Markets 135-136 (Oct. 2017), 
https://home.treasury.gov/system/files/136/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.
    \39\ Proposal at V.
---------------------------------------------------------------------------

Conclusion

    Despite my concerns regarding this Proposal, I look forward to 
hearing constructive input from market participants and the public. 
I am encouraged by the balanced nature of the requests for comment, 
and would like to modestly request that in responding to the 
Proposal, commenters indicate whether they believe it is appropriate 
and prudent for the Commission to proceed with a rulemaking at this 
time, or whether the preference is to adhere to the current 
Guidance, or some hybrid of the two.
    As with all rulemakings, input the Commission receives through 
public comment drives the conversation, and sets us on a course that 
balances diverse interests; seeks transparency, resiliency, and 
efficiency; and above all else, focuses on protecting U.S. markets, 
its participants and most importantly the customers that rely on 
this truly global marketplace. One might assume that making 
targeted, surgical changes to an existing regulatory framework is 
easier than creating a framework. But, in some circumstances, it is 
exactly the opposite. Global swaps markets have grown and evolved 
around rule sets that were completed and implemented in the very 
recent past. As regulators I believe we should caution against any 
wholesale rewrite when we find well regulated, transparent, and 
generally well running financial markets. But, if we do find 
vulnerabilities or inefficiencies in our rules (certainly both old 
and new), the process to reconsider should be deliberate, balanced, 
and inclusive to ensure the Commission, as a collective body, 
understands the gravity of its decisions.

Appendix 5--Dissenting Statement of Commissioner Dan M. Berkovitz

    I dissent from today's cross-border swap regulation proposal 
(the ``Proposal'') because it would significantly weaken the 
Commission's existing regulatory framework that protects the United 
States from risky overseas swaps activity. The existing cross-border 
framework has worked well over the past six years to protect the 
U.S. financial system from risks from cross-border swaps activity, 
while simultaneously enabling U.S. banks to compete successfully in 
overseas markets.\1\ The Proposal would create multiple loopholes 
for U.S. banks to evade the Commission's oversight of their cross-
border activity and pose risks to the U.S. financial system. With a 
wink and a nod, U.S. banks could effectively guarantee their 
overseas swap dealing affiliates from losses while also enabling 
those affiliates to escape regulation as swap dealers. The Proposal 
would enable U.S. banks to book their swap trades in unregistered 
foreign affiliates that would not be required to report their swaps 
in the United States, and would not be subject to our capital, 
margin, and risk management requirements.
---------------------------------------------------------------------------

    \1\ U.S. banks are the strongest in the world. The Global League 
Tables ranking global banks by amount of banking business activity 
shows that three or four U.S. banks are in the top five banks in 
almost every category, including for banking business in foreign 
markets. See GlobalCapital.com, Global League Tables, available at 
https://www.globalcapital.com/data/all-league-tables. While we could 
not locate a global ranking of banks by swap business, 
GlobalCapital.com selected Bank of America Merrill Lynch as 
``derivatives house of the year'' and four of the seven other banks 
shortlisted for the award were U.S. banks. See Ross Lancaster, 
Global Derivatives Awards 2019: the winners, GlobalCapital.com 
(Sept. 26, 2019), available at https://www.globalcapital.com/article/b1h9txdc91yw4k/globalcapital-global-derivatives-awards-2019-the-winners. By comparison, in 2006, ``Deutsche Bank dominate[d] in 
every region'' in the competition for derivatives house of the year. 
See Yassine Bouhara, Global Derivatives House of the Year, 
GlobalCapital.com, (Nov. 9, 2006), available at https://www.globalcapital.com/article/k64qjpc6mxwc/global-derivatives-house-of-the-year.
---------------------------------------------------------------------------

    The Proposal also sends us down a rabbit hole with a complex new 
entity designation, ``Significant Risk Subsidiary'' (``SRS''). An 
SRS would be a type of overseas swap dealing affiliate that in 
theory is subject to greater Commission oversight. The Proposal 
admits, however, that there would be ``few, if any,'' entities in 
this elusive category.\2\ What is the purpose of creating a 
complicated category that does not include a single entity? This is 
a Seinfeldian regulation--a regulation about nothing.\3\
---------------------------------------------------------------------------

    \2\ See Proposal, section VII.C.2(i).
    \3\ See Wikipedia.org, Seinfeld, available at https://en.wikipedia.org/wiki/Seinfeld.
---------------------------------------------------------------------------

    The Proposal would transform the Commission from a watchdog 
guarding U.S. shores into a timid turtle, reluctant to poke its head 
out of its domestic shell. When the next financial crisis arrives, 
will foreign governments bail out affiliates of U.S. persons located 
in their jurisdictions? Experience has taught us that while finance 
may be global, global financial rescues are American. With today's 
Proposal, I fear that the U.S. tax payer will once again be called 
on to bear the costs. We've been down this de-regulatory road 
before, and it ended in disaster for the United States and the 
global financial system. Congress enacted the Dodd-Frank Act to 
avoid these same mistakes, yet today the Commission is voting out a 
proposal that ignores both those lessons and the law.

Why Cross-Border Swaps Must Be Regulated by the CFTC

    It seems that every few years, we must remind ourselves of why 
regulating cross-border financial transactions, and swaps in 
particular, is important to managing systemic risk. If we forget, 
the financial system delivers its own destructive reminders. 
Examples from recent history prove that foreign financial activity, 
usually involving swaps, can lead to massive losses triggering the 
need for emergency action by the Department of the Treasury and/or 
the Federal Reserve System--sometimes at the expense of the U.S. 
taxpayer. As described later in my statement, the Proposal would 
undermine the direction in CEA section 2(i) to regulate cross-border 
swap activity, and again allow such activity by U.S. financial 
institutions to go unobserved and unsupervised.
    In 1998, the U.S. hedge fund Long-Term Capital Management L.P. 
(``LTCM'') was saved from failure through an extraordinary bailout 
by 15 banks. The bailout was brokered by the Federal Reserve Bank of 
New York. The near failure of LTCM roiled financial markets. The 
financial system could have seized up if LTCM had failed because of 
the large and opaque derivatives exposures that many U.S. banks had 
with LTCM.\4\ Although LTCM was mostly managed from Connecticut, it 
was a Cayman Islands entity with over a dozen affiliates, only $4 
billion in capital, and a complex derivatives book with a notional 
amount in excess of $1 trillion.\5\
---------------------------------------------------------------------------

    \4\ See The President's Working Group on Financial Markets, 
Hedge Funds, Leverage, and the Lessons of Long-Term Capital 
Management (Apr. 1999) available at http://www.treasury.gov/resource-center/fin-mkts/Documents/hedgfund.pdf; see also 
International Monetary Fund, World Economic Outlook and 
International Capital Markets (Dec. 1998), available at https://www.imf.org/external/pubs/ft/weo/weo1298/pdf/file3.pdf.
    \5\ Id.
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    In 2007, U.S.-based Bear Stearns provided loans intended to 
shore up two Cayman Islands hedge funds sponsored by Bear

[[Page 1014]]

Stearns. Bear Stearns was not legally obligated to back the funds 
financially. Those actions were the beginning of a chain of events 
that eventually led to the fire sale of Bear Stearns to J.P. Morgan 
in March 2008. To entice J.P. Morgan to buy a distressed Bear 
Stearns, the Federal Reserve System provided financial support for 
the purchase.\6\ This is not to suggest that Bear Stearns failed 
solely because of swap activity, but to illustrate how financial 
institutions are essentially obligated to support foreign affiliated 
entities even when they do not guarantee performance, and how such 
support can have serious consequences to the U.S. financial system.
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    \6\ See Reuters, Timeline: A dozen key dates in the demise of 
Bear Stearns (Mar. 17, 2008), available at https://www.reuters.com/article/us-bearstearns-chronology/timeline-a-dozen-key-dates-in-the-demise-of-bear-stearns-idUSN1724031920080317.
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    Walter Wriston, former chairman and CEO of Citicorp, testified 
to Congress regarding the obligation of a parent bank to bail out a 
subsidiary, no matter the degree of legal separation: ``It is 
inconceivable that any major bank would walk away from any 
subsidiary of its holding company. If your name is on the door, all 
of your capital funds are going to be behind it in the real world. 
Lawyers can say you have separation, but the marketplace is 
persuasive, and it would not see it that way.'' \7\
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    \7\ See https://en.wikipedia.org/wiki/Walter_Wriston (citing 
Financial Institutions Restructuring and Services Act of 1981, 
Hearings on S. 1686, S. 1703, S. 1720 and S. 1721, before the Senate 
Committee on Banking, Housing, and Urban Affairs, 97th Congress, 1st 
Session, Part 11, 589-590) (italics added).
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    When Lehman Brothers went bankrupt and triggered the 2008 
financial crisis, its London affiliate, Lehman Brothers 
International Europe, had a book of nearly 130,000 swaps that took 
many years to resolve in bankruptcy.\8\ Soon thereafter, American 
International Group would have failed as a result of swaps trading 
by the London operations of a subsidiary, AIG Financial Products, if 
not for over $180 billion of support from the Federal Reserve System 
and the U.S. Department of Treasury. \9\
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    \8\ See Interpretive Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292, 45294 (July 
26, 2013) (``2013 Guidance'').
    \9\ Id. at 45293-94.
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    In 2012, on the eve of the swap dealer regulations going into 
effect, J.P. Morgan Chase & Co. disclosed multi-billion dollar 
losses from credit-related swaps managed through its London chief 
investment office. While this loss did not require the Treasury or 
the Federal Reserve System to act, it did result in an enforcement 
action by the CFTC. The enforcement order detailed how the trading 
activity that caused the loss would have been subject to tighter 
controls and oversight--and likely would not have happened--if the 
activity had been subject to swap dealer regulation by the CFTC.\10\
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    \10\ See In re JPMorgan Chase Bank, N.A., CFTC No. 14-01, 2013 
WL 6057042, at *6-8 (Oct. 16, 2013), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfjpmorganorder101613.pdf.
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    Each of these very substantial financial failures occurred at 
least in part because of overseas activity by U.S. financial 
institutions. Although the activity occurred away from the United 
States, and was not subject to direct U.S. regulatory oversight, the 
risks and the costs both came back to the United States.
    Foreign derivatives activity is of particular concern because 
derivatives are, by their very nature, contracts that can transfer 
large amounts of risk between entities and across borders. Congress 
recognized this concern when it adopted CEA section 2(i) applying 
the swaps provisions of the Dodd-Frank Act to regulate cross-border 
swaps activity that has a ``direct and significant connection with 
activities in, or effect on, commerce of the United States.'' 
Notably, this cross-border jurisdiction is both activity-based as 
well as effects-based. It is the nature of the activity and its 
connection to commerce in the United States--not simply the level of 
risk presented--that is the basis for the CFTC's cross-border 
jurisdiction. Congress recognized that we cannot always foresee the 
risks presented by swap activities. By supposedly focusing on risk, 
the Proposal ignores this crucial insight and critical component of 
the Commission's cross-border jurisdiction.
    But even with respect to activities presenting serious risks to 
the United States, the Proposal gets it wrong. The risks incurred by 
foreign affiliates are transferred, or otherwise inure, to the U.S. 
parent firms in several ways. The traditional method was for the 
U.S. parent to guarantee the swap payment obligations of its foreign 
affiliates. Swap dealers removed many of those formal, written 
guarantees that were executed prior to the financial crisis in 2014 
after the 2013 Guidance was issued (more on that later). 
Alternatively, using inter-affiliate swaps, a foreign affiliate 
typically transfers to its U.S. parent all of the risk it incurs in 
a swaps portfolio. While the U.S. parent may not be directly liable 
to the counterparties of its foreign affiliate, any losses of the 
affiliate are equivalent to losses the parent incurs on its swap 
with the affiliate. If the affiliate makes bad bets, the parent pays 
for them. Finally, a U.S. parent can be less directly responsible 
for its foreign affiliate's swap obligations through capital 
contribution arrangements (e.g., keepwell agreements or deed-poll 
arrangements), or simply because letting an affiliate fail and 
default to numerous foreign entities is untenable as a business 
matter. As Walter Wriston noted, as a matter of market survival a 
U.S. bank would not allow a wholly-owned affiliate to fail and 
default on its swap obligations.
    The Commission's regulation of cross-border swap activity should 
address all of these risk transfer conduits. At the same time, it 
should be flexible enough to allow U.S. banks to compete in global 
markets. In my view, the 2013 Guidance and the attendant no action 
relief achieved the right balance and is working well. As noted 
above, U.S. banks are competing throughout the world. In fact, they 
are out-competing their non-U.S. competitors. There is no persuasive 
reason to weaken a regulatory standard that is consistent with our 
law and that has successfully protected the American people for the 
last six years--while simultaneously witnessing the global 
preeminence of American banks. The Proposal snatches defeat from the 
jaws of victory.
    The Proposal would greatly weaken the Commission's ability to 
monitor and regulate foreign swap activity by U.S. financial 
institutions, putting our financial system at risk once again. Only 
ten years after the financial crisis, the Proposal tosses aside hard 
lessons learned at the expense of 10% unemployment, millions of 
foreclosures, massive bailouts, and lasting damage to the economic 
fortunes of tens of millions of our fellow citizens. It does this in 
the interest of secondary considerations--harmonization, a 
``workable framework'' for regulations, and reducing costs. Whereas 
``legal certainty'' was the buzzword to limit the CFTC's 
jurisdiction over the swaps market in the 1990s and 2000s, today's 
de-regulatory mantra includes ``harmonization,'' ``reducing 
fragmentation,'' and ``deference.'' Call it what you like, but the 
results are intended to be the same: Preventing the CFTC from 
overseeing the swaps activity of major U.S. banks. Creating the 
possibility for another taxpayer-funded bailout for overseas swap 
activity cannot possibly be the right outcome for the American 
people.

What Is Wrong With the Proposal

    The Proposal starts on a good note by essentially adopting the 
interpretation of CEA section 2(i) contained in the 2013 Guidance. 
The Proposal also acknowledges that ``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.'' \11\ It then explains that the entities in a 
global financial enterprise provide ``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.'' \12\ The Proposal then uses the basic framework of 
the 2013 Guidance and adopts some of its substantive provisions.
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    \11\ Proposal, section I.B. (noting that large U.S. banks have 
thousands of affiliated entities around the world.)
    \12\ Id. The Proposal notes that ``even in the absence of an 
explicit arrangement or guarantee, the parent entity may, for 
reputational or other reasons, choose or be compelled to assume the 
risk incurred by its affiliates, branches, or offices located 
overseas.''
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    But the Proposal makes a number of changes to key provisions, 
all geared toward limiting the application of our regulations. Most 
concerning are the narrowing of the definition of ``guarantee'' and 
``U.S. persons,'' and codifying full relief for arranging, 
negotiating, or executing (``ANE'') swaps in the United States that 
are then booked in non-U.S. legal entities. Together, these 
provisions in the Proposal create a loophole through which U.S. 
financial institutions can undertake substantial swap dealing 
activity outside the U.S. swap regulatory regime through 
unregistered foreign affiliates and bring the risks they incur back 
to the United

[[Page 1015]]

States. In addition, these key provisions allow U.S. persons to 
undertake substantial dealing activity inside the United States and 
then evade regulation by booking the trades in foreign entities. 
Together, these provisions will codify a framework for circumventing 
our swap regulations greatly undermining CEA section 2(i) and Title 
VII of the Dodd-Frank Act.
    I am concerned that codifying this result will encourage U.S. 
banks to book much of their swap dealing activity in foreign 
affiliates that limit their swap dealing with U.S. persons and 
therefore will not have to register as swap dealers. Under the 
narrowed definition of ``guarantee'' in the Proposal, the U.S. 
parents would be able to provide full financial support to these 
unregistered foreign affiliates, just not in the form of an 
explicit, direct swap payment guarantee. Furthermore, these changes 
will allow two U.S. entities, whether they are, for example, two 
global banks or a global bank and a large U.S. corporation, 
insurance company or hedge fund, to trade with each other without 
subjecting that trade to U.S. oversight so long as the trade is 
booked in foreign affiliates. Finally, by largely eliminating the 
ANE requirement,\13\ those U.S. firms can use their employees in the 
United States for that trading activity and still evade U.S. 
regulation if the swaps are booked in foreign affiliates. As 
discussed above and acknowledged in the Proposal, the U.S. parents 
will still be on the hook because the risks incurred by the foreign 
affiliates is transferred back to the U.S. parent through swaps with 
the affiliate and/or through other capital support mechanisms.
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    \13\ At my request, the preamble to the Proposal was modified to 
clarify that our anti-fraud and anti-manipulation regulations never 
the less apply to the conduct occurring in the United States.
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    This outcome is not merely an issue of whether the foreign 
affiliates of U.S. persons need to register as swap dealers. By not 
registering, these foreign affiliates will not need to report their 
swap activity to CFTC registered swap data repositories. They will 
not be subject to our margin, capital, and risk management 
requirements. These firms will not be subject to the swap dealing 
best practices that our regulations require. CEA section 2(i) will 
be undermined.
    The three changes in the Proposal are intended to address 
unintended effects on previously standard business practices that 
helped U.S. banks compete in global markets. A foreign counterparty 
that is not headquartered in the United States (a ``true non-U.S. 
entity'') may not want to trade with affiliates of U.S. banks, or 
with bank employees in the United States, if doing so means the true 
non-U.S. entity would need to count those swaps toward its CFTC swap 
dealer registration threshold.
    Under the 2013 Guidance, guaranteed foreign affiliates of U.S. 
banks are deemed U.S. persons for purposes of counting dealing swaps 
with U.S. persons. The term ``guarantee'' was defined broadly. Once 
it became apparent that true non-U.S. entities did not want to count 
those swaps, U.S. banks de-guaranteed their foreign affiliate swap 
dealers. The 2016 cross border proposal \14\ tried to adjust the 
guidance framework by adding back into the U.S. person definition 
foreign consolidated subsidiaries (``FCS'') that are consolidated on 
the books of a U.S. parent. However, that would have the effect of 
exacerbating the problem for U.S. banks competing for swap business 
with true non-U.S. entities. The Proposal discards the FCS concept 
and narrows the definition of a ``guarantee'' to solely an explicit 
recourse of the counterparty to the U.S. parent for payment on the 
swap. The Proposal further narrows the U.S. person definition to 
delete full recourse subsidiaries and eliminate conduit affiliates 
treatment for the same reasons.
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    \14\ Cross-Border Application of the Registration Thresholds and 
External Business Conduct Standards Applicable to Swap Dealers and 
Major Swap Participants, 81 FR 71946 (Oct. 18, 2016).
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    I am highly skeptical that the status quo will be maintained if 
the ANE no action relief and de-guaranteeing framework are codified. 
Large U.S. banks would have incentives to de-register some of their 
foreign affiliate swap dealers. They are likely to maintain only one 
or two foreign entities that are registered to handle business with 
U.S. persons operating in foreign jurisdictions who want to trade 
with registered swap dealers. Even if they do not de-register those 
swap dealers, swap activity can easily be moved to other 
unregistered foreign affiliates that are supported by their U.S. 
parents in ways other than an explicit swap payment obligation 
guarantee.
    There is a potential alternative for addressing the concerns of 
true non-U.S. entities without also excluding from oversight all 
activity of foreign affiliates of U.S. financial institutions. The 
regulations potentially could provide that, with substituted 
compliance determinations in place for key swap regulations (e.g. 
margin and risk management), true non-U.S. entities can trade with 
foreign affiliates of U.S. entities without counting those swaps 
toward U.S. swap dealer registration. This could be a reasonable 
balance of systemic safety and competitiveness.
    At the same time, foreign entities that are wholly owned by U.S. 
parents would still be required to count swaps with other wholly-
owned foreign affiliates of other U.S. parents. In this way, U.S. 
financial institutions can compete for foreign swap business while 
preventing U.S. firms from evading swap regulation by booking swaps 
with each other in foreign affiliates.
    I invite commenters to address this potential solution.

Seinfeldian Regulation: Significant Risk Subsidiary

    The Proposal contains a new regulatory construct called the 
``Significant Risk Subsidiary'' (``SRS''). It is a putative 
replacement for a broader definition of guarantee and the FCS 
alternative. But it appears to be an empty set. The Cost-Benefit 
Considerations project that ``few, if any'' entities would fall 
within its ambit. It would not accomplish anything.
    The SRS is a very complicated construct, with no less than six 
tests for determining whether a firm would qualify for regulation as 
an SRS. Bizarrely, none of these tests have anything to do with the 
amount of the entity's swap activity. The basic threshold is that 
the entity be affiliated with a commercial enterprise with at least 
$50 billion in capital. Consider this: LTCM had $4 billion in 
capital and a derivatives book with a notional amount of about $1 
trillion at the time it was bailed out.
    Another hurdle excludes any entity regulated by U.S. or foreign 
banking regulators. In effect, the entities that do the vast 
majority of swap dealing in the world are excluded from the SRS 
definition. With so many hurdles for the SRS determination, it 
appears that the Proposal has little interest in actually 
contributing to the control of systemic risk exposure in the U.S. 
financial system. The reasoning goes, if the entity is regulated by 
a banking regulator that follows basic Basel capital and supervision 
standards, then CFTC regulation is unnecessary.\15\ But Congress 
decided in 2010 when it adopted the Dodd-Frank Act that swap dealing 
needed to be separately regulated from prudential bank regulation. 
The catastrophic cross border financial failures discussed 
previously in this statement demonstrate why these additional 
protections are necessary. Prudential regulation alone was 
insufficient to prevent those failures and risks to the financial 
system. Those failures eventually required emergency action by the 
Federal Reserve System and/or the Department of the Treasury.
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    \15\ ``An entity that meets either of these two exceptions, in 
the Commission's preliminary view, would be subject to a level of 
regulatory oversight that is sufficiently comparable to the Dodd-
Frank Act swap regime with respect to prudential oversight. . . . In 
such cases where entities are subject to capital standards and 
oversight by their home country regulators that are consistent with 
Basel III and subject to a CFTC Margin Determination, the Commission 
preliminarily believes that the potential risk that the entity might 
pose to the U.S. financial system would be adequately addressed 
through these capital and margin requirements.'' Proposal, at 
II.C.4.
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Substituted Compliance Shortcomings

    I support the principle of international comity. The CFTC should 
continue to recognize the interests of other countries in regulating 
swap activity occurring within their borders. The 2013 Guidance has 
a flexible, outcomes based substituted compliance review process 
based on a finding that the foreign regulated entities are subject 
to comparable, comprehensive supervision and regulation.\16\ The 
standard of review is effectively the same as the standard 
established by Congress in CEA sections 4(b)(1)(A), 5b(h), and 5h(g) 
for finding, respectively, foreign boards of trade, swap

[[Page 1016]]

execution facilities, and exempt derivatives clearing organizations 
comparable.
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    \16\ ``[T]he Commission will rely upon an outcomes-based 
approach to determine whether these requirements achieve the same 
regulatory objectives of the Dodd-Frank Act. An outcomes-based 
approach in this context means that the Commission is likely to 
review the requirements of a foreign jurisdiction for rules that are 
comparable to and as comprehensive as the requirements of the Dodd-
Frank Act, but it will not require that the foreign jurisdiction 
have identical requirements to those established under the Dodd-
Frank Act.'' 2013 Guidance, 78 FR 45292, 45342-3.
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    The Proposal would apply a lesser standard. It would permit the 
Commission to issue a comparability determination if it determines 
that ``some or all of the relevant foreign jurisdiction's standards 
are comparable.'' The condition that the regulations be 
``comprehensive'' is dropped. Furthermore, unlike the 2013 Guidance 
and the CEA comparability analysis, which require the Commission to 
make a comparability determination or finding based on the standard, 
the Proposal says that the Commission can consider any factors it 
``determines are appropriate, which may include'' \17\ four factors 
listed. This arbitrary, non-standard ``standard'' creates too much 
uncertainty and flexibility. The Commission should not defer 
regulating U.S. bank affiliates to other regulatory jurisdictions 
operating under a lesser standard than the Commission has previously 
used in this context or currently uses in other contexts.
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    \17\ Proposal, rule text section 23.23(g)(4).
---------------------------------------------------------------------------

Conclusion

    The Proposal would allow U.S. banks to evade swap regulation by 
booking swaps in non-U.S. affiliates. The Proposal would enable U.S. 
banks to arrange, negotiate, and execute swaps in New York, but 
avoid swap regulation by booking those swaps in their non-U.S. 
affiliates. A non-U.S. affiliate of a U.S. bank could enter into 
trillions of dollars of swaps with non-U.S. affiliates of other U.S. 
entities without registering with the CFTC as a swap dealer. The 
U.S. parent bank could provide full financial support for those non-
U.S. affiliates so long as the support does not come in the narrow 
form of an explicit swap payments guarantee.
    Ultimately, the risk from all of those swaps will still be borne 
by the parent bank in the United States. These risks can be very 
large. The activities of bank affiliates outside the United States 
have a direct and significant connection with activities in, or 
effect on, commerce in the United States. In Title VII of the Dodd-
Frank Act, the Congress directed the CFTC to apply its swap 
regulations to these activities. Because the Proposal retreats from 
these responsibilities, I dissent.

[FR Doc. 2019-28075 Filed 1-7-20; 8:45 am]
 BILLING CODE 6351-01-P