The CFTC's Final Guidance On
Cross-Border Swaps Trading:
Implications for Canadian
Derivatives Market Participants
Dodd-Fr...
Speakers

• D. Kordell Fournier, TD Securities, Toronto
– Head, Business Impact Analysis & Surveillance, TDS Strategic Ini...
Outline

• Who’s in and who’s out? Can you get out?
– Final CFTC Cross-Border Guidance
– CFTC Exemptive Order

• What happ...
Background

3 December 2013

4
Overview of Dodd-Frank Title VII

• Dodd-Frank Wall Street Reform and Consumer Protection Act
• Title VII: Wall Street Tra...
Principal Obligations under Dodd-Frank Title VII

• Principal Obligations under Dodd-Frank Title VII
– Registration and Re...
Who’s in and who’s out?
Can you get out?

3 December 2013

7
CFTC Cross-Border Timeline

• July 12, 2012 – Proposed Cross-Border Interpretive Guidance published
• July 12, 2012 – Prop...
CFTC Cross-Border Reach

• CFTC Final Guidance on Extraterritoriality.
– Defines “US Person” for cross-border purposes.

–...
CFTC Final Exemptive Order

• Exemptive Order Regarding Compliance With Certain Swap Regulations.
– Effective date: 13 Jul...
Exemptive Order: Canadian Swap Dealers and MSPs

• Phase-in of Entity-Level and Transaction-Level Requirements for non-US
...
CFTC Substituted Compliance Regime

• Non-US SDs may comply with home country “comprehensive” and
“comparable” regulations...
Substituted Compliance: Canada

• CFTC has received substituted compliance submissions from 6 key nonUS jurisdictions, inc...
What happens if you’re in?
Now what?

3 December 2013

14
Determine Whether US Person in Swap

• U.S. Person definition is largely territorial, broader than Exemptive Order,
simila...
US Person Definition Not Exhaustive

• Persons not fully described in the definition of US Person may
nonetheless be treat...
Determine Whether Guaranteed Affiliate in Swap

• Guaranteed Affiliate.
– The term “guaranteed affiliate” refers to a non-...
Determine Whether Conduit Affiliate in Swap

• Interpretive Guidance does not define when a non-US person would be
conside...
Determine Whether a Foreign Branch in Swap

• To qualify as a “foreign branch” of a SD or MSP, the branch must satisfy
the...
Swap “with a Foreign Branch”

• A non-US person will be treated as trading a swap “with a foreign branch”
only if certain ...
Determine Whether SD De Minimis Threshold Met

• In swap dealer de minimis calculations:
– a US person must count all of i...
SD De Minimis Calculations

• Must aggregate swaps of affiliates (sans SDs).
– Any person (whether US or non-US) that enga...
Determine Whether MSP Threshold Met

• In determining whether a person must register as an MSP:
– a US person must count a...
Application of Entity-Level Requirements

• Two categories of Entity-Level Requirements (ELRs):
– Category 1: capital, CCO...
Application of Entity-Level Requirements (con't)

US Swap Dealer or MSP (including when
acting though foreign branch)

App...
Application of Transaction-Level Requirements

• Transaction-Level Requirements (TLRs) include:
– mandatory clearing and s...
Compliance with TLRs (Category A)

Counterparty Is:

Foreign Branch

Guaranteed
Affiliate or Affiliate
Conduit

Non-US Per...
Compliance with TLRs (Category B)

Counterparty Is:

Foreign Branch

Guaranteed
Affiliate or
Affiliate Conduit

Non-US Per...
US Branch of Non-US SD Subject to TLRs

• Footnote 513
Consistent with the foregoing rationale, the Commission takes the v...
Harmonization

• Harmonization between CFTC and SEC
– Statutory Mandate

– Actual results

• Harmonization among US and no...
Non-Registrant Requirements

• The following swap requirements apply to swaps between two “nonregistrants”, i.e., where ne...
Compliance with Non-Registrant Requirements

Counterparty A Is:
US Person

Guaranteed Affiliate or
Affiliate Conduit

Non-...
Selected Title VII Consequences for End Users
Selected Dodd-Frank Title VII Consequences for Canadian End User Swap Market...
Swap Execution Facilities (SEFs)

• Definition of Swap Execution Facility
– Multiple to multiple

– CLOB or RFQ

• SEF reg...
Swap Enforceability: Eligible Contract Participant

• Dodd-Frank statute: unlawful for non-ECP to enter off-exchange swap
...
Documentation Issues

• ISDA Dodd-Frank documentation:
– ISDA Dodd-Frank non-US representation letters.
– Dodd-Frank “talk...
Is there hope?
Is the CFTC guidance
open to change or challenge?

3 December 2013

37
Administrative Challenges

• CFTC responses to pending requests for substituted compliance
determinations.
– CFTC has said...
Political Challenges

• Coordination between SEC and CFTC on cross-border rules.
• Risk of creating an uneven playing fiel...
Items to Watch

• Commodities Traders:
– Position Limits.

– Aggregation Rules.
– Large Trader Reporting - new final rules...
Questions?

3 December 2013

41
Thank you!
Elana Hahn
Dentons LLP, Canada
elana.hahn@dentons.com
(416) 863-4560

Jeffrey H. Koppele
Dentons LLP, United St...
Dentons - Locations

3 December 2013

43
Dentons - Offices

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CFTC's Final Guidance on Cross-Border Swaps Trading

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Our panel provided key insights for Canadian derivatives markets participants into the CFTC's final Interpretive Guidance and Policy Statement and July 2013 Exemptive Order.

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  • CFTC's Final Guidance on Cross-Border Swaps Trading

    1. 1. The CFTC's Final Guidance On Cross-Border Swaps Trading: Implications for Canadian Derivatives Market Participants Dodd-Frank Insight Webinar Series December 3, 2013
    2. 2. Speakers • D. Kordell Fournier, TD Securities, Toronto – Head, Business Impact Analysis & Surveillance, TDS Strategic Initiatives • Elana Hahn, Dentons, Toronto – Partner, Securities and Financial Services Practice, Toronto • Jeffrey H. Koppele, Dentons, New York – Partner, Dentons Team Leader for Dodd-Frank Title VII Issues 3 December 2013 2
    3. 3. Outline • Who’s in and who’s out? Can you get out? – Final CFTC Cross-Border Guidance – CFTC Exemptive Order • What happens if you’re in? Now what? – Determine Swap Dealer (SD) or Major Swap Participant (MSP) Status – Identify Acceptable Swap Counterparties – Applicability of Transaction-Level or Entity-Level Requirements – CFTC Advisory 13-69 (November 14, 2013) – Consider Availability of Substituted Compliance – Confirm Eligibility (ECP status) of all US Counterparties – Dodd-Frank Forms, Protocols, Representation Letters • Is there hope? … – Guidance vs. Rule … is the CFTC guidance open to change or challenge? 3 December 2013 3
    4. 4. Background 3 December 2013 4
    5. 5. Overview of Dodd-Frank Title VII • Dodd-Frank Wall Street Reform and Consumer Protection Act • Title VII: Wall Street Transparency and Accountability Act of 2010: – Regulates Products ○ Swaps and security-based swaps – Regulates Entities ○ SDs and security-based swap dealers ○ MSPs and major security-based swap participants ○ Derivatives market infrastructure: clearing, trading, reporting facilities – Bifurcates Regulatory Jurisdiction Based on Product ○ CFTC regulates swaps and related entities ○ SEC regulates security-based swaps and related entities ○ Mixed swaps 3 December 2013 5
    6. 6. Principal Obligations under Dodd-Frank Title VII • Principal Obligations under Dodd-Frank Title VII – Registration and Regulation of SDs and MSPs – Mandatory clearing and exchange-style trade execution – Margin and segregation requirements for uncleared swaps – Trade reporting and recordkeeping – Statutory prohibition on off-exchange swap by a person that is not an eligible contract participant (ECP) – Extraterritorial application to cross-border swaps – Position limits and large trade reporting for physical commodity derivatives – Business conduct and documentation standards for swap dealers and new duties for customers – Risk management, compliance, and other internal duties for swap dealers 3 December 2013 6
    7. 7. Who’s in and who’s out? Can you get out? 3 December 2013 7
    8. 8. CFTC Cross-Border Timeline • July 12, 2012 – Proposed Cross-Border Interpretive Guidance published • July 12, 2012 – Proposed Cross-Border Exemptive Order published • January 7, 2013 – Final Cross-Border Exemptive Order – expired July 12, 2013 • July 13, 2012 - Final Exemptive Order effective – expires in various stages until December 21, 2013 • July 26, 2013 - Final Interpretive Guidance published and effective 3 December 2013 8
    9. 9. CFTC Cross-Border Reach • CFTC Final Guidance on Extraterritoriality. – Defines “US Person” for cross-border purposes. – Applies Title VII to foreign branches, subsidiaries and affiliates of US Persons. – Registration Thresholds for non-US Swap Dealers and MSPs. – Defines and categorizes “Entity-level” and “Transaction-level” requirements. – Substituted compliance based on comparably robust home country regulation. • Final Exemptive Order. – Supplements Final Guidance. – Delays compliance for certain matters. • Recent CFTC Advisory Letters 3 December 2013 9
    10. 10. CFTC Final Exemptive Order • Exemptive Order Regarding Compliance With Certain Swap Regulations. – Effective date: 13 July 2013. – Expiry date: 21 December 2013. ○ Intermediate expiry dates apply for various purposes. • Exemptive Order continues January 2013 Order in certain respects. – Several provisions of January Order were applicable through 9 October 2013 (US Person definition, SD and MSP threshold calculations). – Exemptive Order not clear but possibly asserting that new “foreign branch” rules were applicable from 13 July 2013. – Non-US branches required to clear as of 9 October 2013. 3 December 2013 10
    11. 11. Exemptive Order: Canadian Swap Dealers and MSPs • Phase-in of Entity-Level and Transaction-Level Requirements for non-US swap dealers and MSPs, and TLRs for foreign branches, in Australia, Canada, the EU, Hong Kong, Japan or Switzerland. • Last phase-in date: 21 December 2013 or 30 days following the issuance by the CFTC of a substituted compliance determination: – SDR Reporting for swaps of non-US SDs with non-US person counterparties, but only if the non-US SD (i) was not part of a US bank group or US financial group and (ii) complied with certain recordkeeping and reporting requirements. – all other Transaction-Level and, for non-US SDs and MSPs, Entity-Level requirements, other than the following, with which compliance is already required: ○ SDR Reporting other than described above, and Large Trader Reporting, ○ Mandatory clearing, and ○ Real-time reporting for swaps with guaranteed and conduit affiliates. 3 December 2013 11
    12. 12. CFTC Substituted Compliance Regime • Non-US SDs may comply with home country “comprehensive” and “comparable” regulations instead of CEA. CFTC comparability determined on a requirement category basis (13 categories in all) and not based on foreign regime as a whole. • Entity-level requirements (except for Large Trader Reporting) for non-US SDs are in scope for substituted compliance. • Some Transaction-level requirements for non-US SD trades with non-US persons guaranteed by US persons and trades with non-US branches of US SDs are in scope for substituted compliance. • Non-US branch of US SD may use substituted compliance for trades with non-US persons (whether or not guaranteed by a US person or a conduit affiliate) or another non-US branch of a US SD. 3 December 2013 12
    13. 13. Substituted Compliance: Canada • CFTC has received substituted compliance submissions from 6 key nonUS jurisdictions, including the EU, Canada and Japan. Factors considered in determining comparability: – Scope and objectives and comprehensiveness of foreign requirement – Comprehensiveness of foreign regulator’s supervisory compliance program – Foreign regulator’s authority to support and enforce oversight of non-US SD • CFTC must determine substituted compliance in the context of a fundamentally different regulatory framework: – No regulatory body equivalent to the CFTC. – Banks regulated federally by OSFI implementing G20 commitments but DoddFrank Act goes beyond G20 commitments. • CFTC has indicated that ELR SC determinations to be complete by 21 December for these 6 Key Jurisdictions, but less clarity about TLRs. 3 December 2013 13
    14. 14. What happens if you’re in? Now what? 3 December 2013 14
    15. 15. Determine Whether US Person in Swap • U.S. Person definition is largely territorial, broader than Exemptive Order, similar to CFTC's proposed guidance. • US guarantee does not make you a US person. • Principal place of business: – Funds: based on location of the manager if in the US. – Other Entities: generally the headquarters / center of direction and control. • Fund majority-owned by US Persons: – Generally look to direct, not indirect, owners. – However, must look through to owners of a legal entity controlled by or under common control with the fund. – Exception from US person definition for a fund that is publicly offered only to non-US persons and not offered to US persons. 3 December 2013 15
    16. 16. US Person Definition Not Exhaustive • Persons not fully described in the definition of US Person may nonetheless be treated as a US Person under the Interpretive Guidance. • CFTC indicates the following factors are relevant to this determination: – connections between the person's swap activities and US commerce; – the extent to which the person's swap activities are conducted in the US; – the importance to the US (as compared to other jurisdictions where the person may be active) of regulating the person's swap activities; – the likelihood that treating the person as a US person could lead to regulatory conflicts; and considerations of international comity. 3 December 2013 16
    17. 17. Determine Whether Guaranteed Affiliate in Swap • Guaranteed Affiliate. – The term “guaranteed affiliate” refers to a non-US person that is affiliated with, and whose swap obligations are guaranteed by, a US person. – Broad definition of "guarantee." • Guaranteed affiliates are treated similarly to a US person. 3 December 2013 17
    18. 18. Determine Whether Conduit Affiliate in Swap • Interpretive Guidance does not define when a non-US person would be considered a “conduit affiliate.” • Relevant factors include whether: – the non-US person is a majority-owned affiliate of a US person; – the non-US person is controlling, controlled by, or under common control with the US person; – the financial results of the non-US person are included in the consolidated financial statements of the US person; and – the non-US person, in the regular course of business, engages in swaps with non-US third parties for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its US affiliate(s), and enters into offsetting swaps or other arrangements with its US affiliates in order to transfer the risks and benefits of such swaps with third-parties to its US affiliates. 3 December 2013 18
    19. 19. Determine Whether a Foreign Branch in Swap • To qualify as a “foreign branch” of a SD or MSP, the branch must satisfy the “Foreign Branch Characteristics.” • These characteristics are satisfied if the branch: – is a “foreign branch” (as defined in the applicable banking regulation) of a US bank that is subject to US Federal Reserve System Regulation K or the US FDIC International Banking Regulation, – maintains accounts independently of the home office and of the accounts of other foreign branches and determines its own separate profit and loss, and – is subject to substantive local regulation in banking or finance. • The CFTC will also consider other relevant facts and circumstances. • Exemptive Order: Compare Paragraph (3) of Order with Footnote 53. 3 December 2013 19
    20. 20. Swap “with a Foreign Branch” • A non-US person will be treated as trading a swap “with a foreign branch” only if certain factors are present, including: – the employees negotiating and agreeing to the terms of the swaps (other than employees with solely clerical or ministerial functions) are located in such foreign branch or in another foreign branch of the US bank; – the foreign branch or another foreign branch is the office through which the US bank makes payments under the swap and the documentation for the swap specifies that the office for the US bank is the foreign branch; – the foreign branch enters into the swap in its normal course of business; – the swap is treated as a swap of the foreign branch for tax purposes; and – the swap is reflected in the local accounts of the foreign branch. 3 December 2013 20
    21. 21. Determine Whether SD De Minimis Threshold Met • In swap dealer de minimis calculations: – a US person must count all of its dealing swaps, whether with US or non-US counterparties; – a guaranteed affiliate or conduit affiliate must count all of its dealing swaps, whether with US or non-US counterparties; – a non-US person that is not a guaranteed affiliate or conduit affiliate must count swaps with: ○ US persons, other than foreign branches of US swap dealers, and ○ guaranteed affiliates, except where the guaranteed affiliate:  is registered as a swap dealer,  is not a swap dealer but engages in de minimis swap dealing activity and is affiliated with a swap dealer, or  is guaranteed by a non-financial entity. 3 December 2013 21
    22. 22. SD De Minimis Calculations • Must aggregate swaps of affiliates (sans SDs). – Any person (whether US or non-US) that engages in swap dealing with a US person must aggregate all dealing swaps that it counts toward its de minimis test of all its US and non-US affiliates under common control, other than swaps of an affiliate (either US or non-US) that is a registered swap dealer. – As a practical matter, this means that an affiliated group may enter into dealing swaps in an aggregate amount equal to the de minimis threshold before one or more entities in the group must register as a swap dealer. • May disregard certain anonymous swaps. 3 December 2013 22
    23. 23. Determine Whether MSP Threshold Met • In determining whether a person must register as an MSP: – a US person must count all swaps, whether with US or non-US counterparties; – a guaranteed affiliate or conduit affiliate must count all swaps, whether with US or non-US counterparties; – a non-US person that is not a guaranteed affiliate and is a financial entity must count swaps with: ○ US persons (other than foreign branches of US swap dealers) ○ foreign branches of US swap dealers or guaranteed affiliates that are swap dealers, unless the swap is cleared or the swap documentation requires the foreign branch or guaranteed affiliate to collect daily variation margin (with no threshold). – a non-US person that is not a guaranteed affiliate and is not a financial entity must only count swaps with US persons (other than foreign branches of US swap dealers). • Guaranteed swaps are generally attributed to the guarantor. 3 December 2013 23
    24. 24. Application of Entity-Level Requirements • Two categories of Entity-Level Requirements (ELRs): – Category 1: capital, CCO, risk management, certain swap data recordkeeping. – Category 2: SDR Reporting, other recordkeeping, Large Trader Reporting. • Compliance with ELRs. – US SDs and MSPs, including foreign branches, must comply with all ELRs. – Non-US SDs and MSPs must also comply, but may be eligible for substituted compliance in certain circumstances. • Substituted compliance. – May be available where local law achieves objectives of Dodd-Frank. – “Outcomes based”; depends on CFTC comparability determination. 3 December 2013 24
    25. 25. Application of Entity-Level Requirements (con't) US Swap Dealer or MSP (including when acting though foreign branch) Apply. First Category: Substituted Compliance. Non-US Swap Dealer or MSP 3 December 2013 Second Category: Apply for US counterparties; Substituted Compliance for SDR reporting with non-US counterparties that are not guaranteed or conduit affiliates; Substituted compliance (except for Large Trader Reporting) with non-US counterparties. 25
    26. 26. Application of Transaction-Level Requirements • Transaction-Level Requirements (TLRs) include: – mandatory clearing and swap processing; – margining (and segregation) for uncleared swaps; – mandatory trade execution; – swap trading relationship documentation; – portfolio reconciliation and compression; – real-time public reporting; – trade confirmation; – daily trading records; and – external business conduct standards. • Interpretive Guidance classifies all TLRs except external business conduct standards as “Category A” and external business conduct standards as “Category B”. 3 December 2013 26
    27. 27. Compliance with TLRs (Category A) Counterparty Is: Foreign Branch Guaranteed Affiliate or Affiliate Conduit Non-US Person Other Than A Guaranteed Affiliate or Affiliate Conduit Apply Apply Apply Apply. Foreign Branch Apply Apply / Substituted Compliance Apply / Substituted Compliance Apply / Substituted Compliance or 5% Exemption1 Non-US Swap Dealer or MSP Apply Apply / Substituted Compliance Apply / Substituted Compliance Do Not Apply US Branch of a Non-US Swap Dealer or MSP Apply Apply Apply Apply Swap Dealer or MSP is: US Swap Dealer or MSP 1 US Person (other than Foreign Branch) A foreign branch of a US SD established outside Canada, EU, Switzerland, Japan, Hong Kong, Australia (the “Six Jurisdictions”) may qualify for local law compliance in lieu of TLRs for swaps with non-US persons that are not guaranteed affiliates or conduit affiliates, if the aggregate volume of all the swaps of the US swap dealer’s foreign branches outside the Six Jurisdictions is 5% or less of the US SD's total swap volume (measured by notional amount) and the US person maintains records with supporting information for the 5% limit and to identify, define, and address any significant risk that may arise from the non-application of the Transaction-Level Requirements. 3 December 2013 27
    28. 28. Compliance with TLRs (Category B) Counterparty Is: Foreign Branch Guaranteed Affiliate or Affiliate Conduit Non-US Person Other than a Guaranteed Affiliate or Affiliate Conduit Apply Apply Apply Apply Foreign Branch of US Bank that is a Swap Dealer or MSP. Apply Do Not Apply Do Not Apply Do Not Apply Non-US Swap Dealer or MSP Apply Do Not Apply Do Not Apply Do Not Apply US Branch of Non-US Swap Dealer or MSP Apply Apply Apply Apply US Person (other than a Foreign Branch) US Swap Dealer or MSP Swap Dealer or MSP is: 3 December 2013 28
    29. 29. US Branch of Non-US SD Subject to TLRs • Footnote 513 Consistent with the foregoing rationale, the Commission takes the view that a US branch of a non-US swap dealer or MSP would be subject to Transaction-Level requirements, without substituted compliance available. As discussed above, a branch does not have a separate legal identity apart from its principal entity. Therefore, the Commission considers a US branch of a non-US swap dealer or non-US MSP to be a non-US person (just as the Commission considers a foreign branch of a US person to be a US person). Nevertheless, the Commission also recognizes its strong supervisory interest in regulating the dealing activities that occur with the United States, irrespective of the counterparty (just as the Commission allows for substituted compliance for foreign branches in certain instances to take into account the strong supervisory interest of local regulators). • November 14 CFTC Advisory Letter – US-based employees or agents acting for non-US affiliate may trigger Transaction-Level requirements. – CFTC "no-action" relief until January 14, 2014. 3 December 2013 29
    30. 30. Harmonization • Harmonization between CFTC and SEC – Statutory Mandate – Actual results • Harmonization among US and non-US Regulators • Example: – CFTC margin requirements are at the transaction-level. – SEC proposed margin requirements are at the entity-level. – Consequence: availability of substituted compliance for a foreign branch. ○ CFTC: Foreign branch TLRs eligible for substituted compliance. ○ SEC: Foreign branch ELRs not eligible for substituted compliance. ○ Note: this could be within the same entity – a foreign branch of a non-bank. 3 December 2013 30
    31. 31. Non-Registrant Requirements • The following swap requirements apply to swaps between two “nonregistrants”, i.e., where neither party is a Swap Dealer or MSP (NonRegistrant Requirements): – – – – – – mandatory clearing; trade execution; real-time public reporting; Large Trader Reporting; Swap Data Repository (SDR) Reporting; and swap data recordkeeping. 3 December 2013 31
    32. 32. Compliance with Non-Registrant Requirements Counterparty A Is: US Person Guaranteed Affiliate or Affiliate Conduit Non-US Person Other Than A Guaranteed Affiliate or Affiliate Conduit US Person Apply Apply Apply Guaranteed Affiliate or Affiliate Conduit Apply Apply; Substituted Compliance, but not for Large Trader Reporting Do Not Apply, Except for Large Trader Reporting Non-US Person Other Than A Guaranteed Affiliate or Affiliate Conduit Apply Do Not Apply, Except for Large Trader Reporting Do Not Apply, Except for Large Trader Reporting Counterparty B is: 3 December 2013 32
    33. 33. Selected Title VII Consequences for End Users Selected Dodd-Frank Title VII Consequences for Canadian End User Swap Market Participants of Swaps with Various Counterparties After Expiry of Exemptive Order. Assumes End User is a Non-US person and is not a SD, MSP, Guaranteed Affiliate, or Conduit Affiliate. Consequences for End User: Counts for SD De Minimis Amount Counts for MSP Thresholds Entity-Level Requirements (First Category) Entity-Level Requirements (Second Category) Transaction-Level Requirements (Category A) Transaction Level Requirements (Category B) Non-Registrant Requirements US Person Yes Yes Apply to US SD or MSP with no substituted compliance Apply to US SD or MSP with no substituted compliance If US Person is SD or MSP, apply with no substituted compliance If US Person is SD or MSP, apply with no substituted compliance Apply with no substituted compliance; if US Person is SD or MSP, see note 7 Non-US Branch of US Bank SD1 No Yes, unless the swap is cleared2 Apply, with no substituted compliance Apply, with no substituted compliance Apply, with substituted compliance or 5% Exemption3 Do not apply 7 Non-US Person SD or MSP No No Apply, with substituted compliance Apply with substituted compliance (except for Large Trader Reporting) Do not apply, subject to November 14, 2013 Advisory Letter Do not apply, subject to November 14, 2013 Advisory Letter Guaranteed Affiliate Yes, subject to significant exceptions4 Yes, unless the swap is cleared2 Do not apply Do not apply Do not apply Do not apply Do not apply, except for Large Trader Reporting Conduit Affiliate No No Do not apply Do not apply Do not apply Do not apply Do not apply, except for Large Trader Reporting; comply with Inter-Affiliate Exemption if applicable 5 6 Apply, with no substituted compliance Apply, with no substituted compliance Apply, with no substituted compliance Apply, with no substituted compliance Counterparty Type: US Branch of NonUS SD or MSP 7 7 1. Assumes that Non-US Branch satisfies "foreign branch" rules in Interpretive Guidance and November 14, 2013 Advisory Letter. Statement in chart applies to a non-US branch or a guaranteed affiliate that is a swap dealer. Alternatively, swap will not count if documentation requires daily variation margin with no threshold (but unclear if minimum transfer amount is a threshold), and position is addressed in swap dealer’s risk management program. 3. 5% Exemption: A foreign branch of a US SD established outside Canada, EU, Switzerland, Japan, Hong Kong, Australia (the “Six Jurisdictions”) may qualify for local law compliance in lieu of transaction-level requirements (Category A) for swaps with non-US person that is not a guaranteed affiliate or conduit affiliate, if the aggregate volume of all the swaps of the US swap dealer’s foreign branches outside the Six Jurisdictions is 5% or less of the US SD's total swap volume (measured by notional amount) and the US person maintains records with supporting information for the 5% limit and to identify, define, and address any significant risk that may arise from the non-application of the transaction-level requirements. 4. An exception applies, and the swap will not count towards the SD de minimis threshold, if the guaranteed affiliate (i) is a registered SD, (ii) has de minimis dealing and is an affiliate of a SD, or (iii) is guaranteed by non-financial entity. 5. Under CFTC logic swap should not count, but not explicitly addressed in Interpretive Guidance. 6. Under CFTC logic swap should not count, but not explicitly addressed in Interpretive Guidance. 7. Not explicitly addressed in Interpretive Guidance. 8. By analogy to footnote 513; not explicitly addressed in Interpretive Guidance. 2. 3 December 2013 33
    34. 34. Swap Execution Facilities (SEFs) • Definition of Swap Execution Facility – Multiple to multiple – CLOB or RFQ • SEF registration became mandatory as of October 2, 2013 – Required Swaps – Footnote 88 – Permitted Swaps • SEF trading remains voluntary – Swaps subject to mandatory clearing must be traded on a CFTC-registered platform if “made available to trade” (MAT) 3 December 2013 34
    35. 35. Swap Enforceability: Eligible Contract Participant • Dodd-Frank statute: unlawful for non-ECP to enter off-exchange swap – Swap may be unenforceable if entered into with non-ECP. • CFTC definition of swap includes guarantee. • CFTC Letter: any guarantor or co-obligor must be an ECP. • Typical Loan Arrangement: – All of borrower's affiliates as guarantors, including non-ECPs. • How to cure: – Exclude non-ECP guarantors from guaranteeing swap (and related loan provisions). – Keepwell 3 December 2013 35
    36. 36. Documentation Issues • ISDA Dodd-Frank documentation: – ISDA Dodd-Frank non-US representation letters. – Dodd-Frank “talk to” letters. – ISDA Dodd-Frank Protocols. • Confirmation issues 3 December 2013 36
    37. 37. Is there hope? Is the CFTC guidance open to change or challenge? 3 December 2013 37
    38. 38. Administrative Challenges • CFTC responses to pending requests for substituted compliance determinations. – CFTC has said entity-level determinations will be complete by 21 December. – Less clarity about transaction-level determinations. • No overarching regulatory body to resolve disputes between jurisdictions. • CFTC may periodically review substituted compliance within a jurisdiction to determine whether the laws/regulations in that jurisdiction continue to achieve suitable regulatory goals. 3 December 2013 38
    39. 39. Political Challenges • Coordination between SEC and CFTC on cross-border rules. • Risk of creating an uneven playing field for the global swaps market: International transactions structured to omit any US component? • Trade negotiation-style “reciprocity” element to substituted compliance determinations and ultimate global coordination? 3 December 2013 39
    40. 40. Items to Watch • Commodities Traders: – Position Limits. – Aggregation Rules. – Large Trader Reporting - new final rules and forms. • Volcker Rule • FATCA 3 December 2013 40
    41. 41. Questions? 3 December 2013 41
    42. 42. Thank you! Elana Hahn Dentons LLP, Canada elana.hahn@dentons.com (416) 863-4560 Jeffrey H. Koppele Dentons LLP, United States jeffrey.koppele@dentons.com (212) 768-6844 D. Kordell Fournier TD Securities, Canada kordell.fournier@tdsecurities.com (416) 308-1558 © 2013 Dentons Dentons is an international legal practice providing client services worldwide through its member firms and affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Please see dentons.com for Legal Notices.
    43. 43. Dentons - Locations 3 December 2013 43
    44. 44. Dentons - Offices Key Canada United States Europe Central and Eastern Europe l Offices l Calgary  Atlanta l Barcelona l Bratislava  Associate offices l Edmonton  Boston l Berlin l Bucharest  Facilities l Montréal l Chicago l Brussels l Budapest u Associate firms l Ottawa l Dallas l Frankfurt l Istanbul l Toronto l Kansas City l Madrid l Prague l Vancouver l Los Angeles l Paris l Warsaw  Miami u Zurich  New Orleans l New York l Phoenix + Special alliance firms l l u Algiers u Bissau u u Bujumbura l Cairo u Cape Town  Kuwait City Casablanca l Manama Dar Es Salaam l Muscat Johannesburg u Beijing l Hong Kong Beirut l Shanghai l Doha l Singapore l Dubai Riyadh Kigali u Luanda u Lusaka Maputo u Nairobi u Nouakchott Kyiv u Port Louis l Moscow u Praia l St. Petersburg u u Washington, DC United Kingdom l l 3 December 2013 l + Lagos u l Abu Dhabi Kampala u St. Louis Asia Pacific Amman u u Silicon Valley l Accra u Short Hills l Middle East u San Francisco l Africa London Milton Keynes Russia and CIS l Central Asia l Almaty u Ashgabat São Tomé l Baku Tripoli l Tashkent 44

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