CFTC Relief and Guidance as the “Swap” Definition Takes Effect: CFTC Issues Interpretive and No-Action Letters, and Responds to Questions Providing Guidance as the Definition of “Swap” Takes Effect

Sullivan & Cromwell LLP - October 15, 2012

The Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”, collectively with the SEC, “Commissions”) adopted rules further defining key terms under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) including “swap dealer”, “major swap participant”, “security-based swap dealer”, “major security-based swap participant” and “eligible contract participant” (the “Entity Definitions”), and subsequently adopted rules further defining additional key terms under Title VII of Dodd-Frank (“Title VII”) including “swap”, “security-based swap” and “mixed swap” (the “Product Definitions”). The Product Definitions generally took effect on October 12, 2012, triggering a number of regulatory obligations under Title VII, except that for purposes of certain relief from SEC requirements, the effective date of the definition of “security-based swap” will be February 11, 2013. On October 10-12, the CFTC issued an unprecedented 13 interpretive and no-action letters as well as three sets of responses to questions previously submitted by industry participants. The letters and other guidance provide clarifications and relief in a number of areas, including:

  • Clarification as to the timing of certain restrictions relating to swap customer collateral.
  • Temporary no-action relief applicable to transactions that may be exempt under pending proposals to exempt certain transactions in electricity markets and certain transactions involving not-for-profit electric cooperatives.
  • Interpretive relief for certain real estate investment trusts (“REITs”) and securitization vehicles from meeting the definition of “commodity pool” under Section 1a(10) of the Commodity Exchange Act (“CEA”).
  • Temporary no-action relief from registration requirements for persons required to register as a introducing broker (“IB”), CPO, CTA, floor broker (“FB”), floor trader (“FT”), or an associated person of an FCM, IB, CPO or CTA, solely by virtue of involvement with swaps and/or certain CME/ICE Contracts.
  • Temporary no-action relief relating to certain swap transactions in exempt and agricultural commodities, including with respect to transactions cleared through CME Group (“CME”) and Intercontinental Exchange (“ICE”) that are being transitioned to a futures model.
  • Interpretive guidance and no-action relief relating to the restriction against a person that is not an eligible contract participant (“ECP”) from entering into a swap unless the swap is entered into on, or subject to the rules of, a designated contract market (“DCM”).
  • Temporary no-action relief that effectively raises the de minimis threshold under the definition of “swap dealer” from $25 million to $800 million with respect to certain swap dealing transactions conducted with special entities that are utilities.
  • Interpretive relief for calculating whether a registered investment company meets certain thresholds for being exempt from CPO registration requirements under Section 4.5 of the CEA.
  • Temporary no-action relief from swap dealer (“SD”), major swap participant (“MSP”), commodity pool operator (“CPO”), and commodity trading advisor (“CTA”) registration requirements on account of foreign exchange forward and foreign exchange swap transactions.
  • Temporary no-action relief for transactions between non-U.S. counterparties for purposes of SD/MSP calculations.
  • Responses to questions relating to the definitions of “swap dealer” and “major swap participant”.
  • Responses to questions relating to the timing of reporting obligations and the reporting of cleared swaps.

A more detailed, but still summary, analysis of these issuances is provided below.