Monday, September 16, 2013

US and Global Hedge Fund Groups Comment on CFTC Cross-Border Exemptive Order on Cross-Border Swaps

In response to the CFTC’s Exemptive Order on compliance with swap regulations issued at the time it adopted final guidance on cross-border swaps regulation, the U.S. and global hedge fund industries explained how the intersection and sequencing of the CFTC’s final cross-border interpretive guidance, the Exemptive Order and the final reporting rules creates problems for funds because, for certain swaps with non-U.S. dealers, it would unintentionally cause funds, rather than dealers, to be responsible for reporting those swaps entered.

Therefore, in a
letter to the CFTC, the Managed Funds Association and the Alternative Investment Management Association requested that, where a fund’s non-U.S. dealer counterparty will register as a swap dealer on December 31, 2013, the CFTC not deem the fund to be the reporting party for the period prior to when such dealer registers as an swap dealer, and thereby, becomes the reporting party with respect those swaps.
In the letter, the MFA and AIMA also urged the CFTC to confirm that, for a non-U.S. fund that becomes a U.S. person at some point after October 10, 2013, the non-U.S. Fund and its affected non-U.S. counterparties will have a 75-day phase-in period from the date the non-U.S. Fund’s status changes to comply with the applicable Dodd-Frank requirements.

On July 12, 2013, the CFTC voted 3-1 to adopt final guidance to provide greater legal certainty and clarity to U.S. and non-U.S. market participants regarding obligations under the Commodity Exchange Act (CEA) with respect to cross-border swaps activities. The guidance embodies the concept of substituted compliance, under which the CFTC would defer to comparable and comprehensive foreign derivatives regulatory regimes. The CFTC also approved by a 3-1 vote an exemptive order giving market participants time to phase in to this new market reality by providing temporary conditional relief from certain swap provisions of the Dodd-Frank Act to non-U.S. swap dealers, as well as foreign branches of U.S. swap dealers.

Under the Exemptive Order, market participants may continue to apply the swap dealer and MSP calculation provisions contained in the January Order, from July 13, 2013 until 75 days after the
Guidance is published in the Federal Register. Accordingly, during this time period, a non-U.S. person may exclude (from its swap dealer de minimis and its MSP threshold calculations) any swap where the counterparty is not a U.S. person, or any swap where the counterparty is a foreign branch of a U.S. person that is registered as a swap dealer.

The hedge fund associations generally support the SEC’s decision to issue the Exemptive Order to provide further transitional relief with respect to its final guidance on cross-border swaps regulation in order to avoid unnecessary market disruptions and to facilitate market participants’ transition to the new Dodd-Frank Act derivatives regulation regime. However, the associations urge the Commission to provide appropriate guidance or relief with respect to reporting party obligations that, in certain limited circumstances, inadvertently fall upon commodity pools, pooled accounts, collective investment vehicles and funds and would complicate unnecessarily achieving the goals of the reporting rules.