In a no-action letter aimed at swap dealers, the Commodity Futures Trading Commission (“CFTC”) Market Participants Division, Division of Clearing and Risk, Division of Data, and Division of Market Oversight offered Brexit-related no-action for some transaction level reporting requirements. Guidance published in the Federal Register by the CFTC on July 26, 2013, set forth when swap dealers organized in the United States with swaps executed by foreign branches could or couldn’t expect to use substituted compliance for clearing, swap processing, margining and segregation, trade execution, trading relationship documentation, portfolio reconciliation and compression, real-time public reporting, trade confirmations, and daily trading records (“Group A Requirements”). Under that 2013 guidance, swaps entered into by a swap dealer’s foreign branches in Australia, Canada, the European Union, Hong Kong, Japan, or Switzerland (the “Six Jurisdictions”) with other entities located in those jurisdictions could follow local rules and receive substituted compliance treatment from the CFTC irrespective of the swap dealer’s swap volume in those countries. A U.S.-based swap dealer’s foreign branch swaps in other foreign jurisdictions with local counterparties, however, couldn’t exceed five percent aggregate notional value measured quarterly, of all the United States-based swap dealer’s swaps, and still be exempt from the Group A Requirements. Using substituted compliance still requires a United States swap dealer to keep records showing that the aggregate notional value of its foreign branch swaps, aside from those conducted in the Six Jurisdictions wasn’t over 5% of the aggregate notional value of all the swap dealer’s swaps, measured quarterly. Further, the swap dealer must keep records identifying, defining, and addressing any “significant risk that may arise” from not applying these U.S. regulations to those trades based in foreign jurisdictions.

In a final rule effective September 14, 2021 (“2021 Rule”), the CFTC expanded the regulations that swap dealers needn’t comply with for swaps executed in foreign jurisdictions with foreign counterparties where those foreign counterparties’ swaps aren’t guaranteed by U.S. persons. The CFTC didn’t add to the Six Jurisdictions in the 2021 Rule. Nor did the 2021 Rule expand the U.S. regulations a swap dealer and its significant risk subsidiaries needn’t comply with if substituted compliance is available or if the aggregate gross notional amount of the swap dealer’s foreign subsidiaries or guaranteed foreign entities exceeds five percent of the swap dealer’s consolidated swap entities’ aggregate gross notional amount of swaps. Instead, the 2021 Rule permits swap dealers without the option for substituted compliance, if foreign subsidiaries in aggregate trade below that five percent threshold, to not keep records of: daily trading, pre-execution trade information, execution information, post trade and portfolio reconciliation and compression information, confirmations and policies for providing and executing confirmations, valuation disputes and notices to the CFTC, Securities and Exchange Commission, or any prudential regulator regarding those valuation disputes, credit support and margin agreements for swaps. Under the 2021 Rule, those “Group B Requirements”, found in 17 CFR 23. 202 and 23.501 through 23.504, would apply via local regulations if substituted compliance is available, so please consider which jurisdiction your subsidiary is in when thinking about the potential relief. Notably, the CFTC issued a comparability determination for the United Kingdom (“UK”), so Group B Requirements will apply to a UK subsidiary’s swaps. Similarly, the 2021 Rule permits swap dealers without the option for substituted compliance and foreign subsidiaries in aggregate trading below that five percent threshold to not follow the requirements for KYC conducted on counterparties, fraud prevention, confidential treatment of counterparty information, disclosures of material information and scenario analysis, daily marks, clearing options, special entity protections, and segregation of margin for swaps offered or entered into by those foreign subsidiaries in foreign jurisdictions with foreign counterparties not guaranteed by any U.S. person. Some or all of those “Group C Requirements”, found in 17 CFR 23.400 through 23.451 and 17 CFR 23.700 through 23.704, could still be substantively required by other regulations, so please check your specific situation.

In no-action letter 21-09, the CFTC staff stated that it will not recommend enforcement actions to the CFTC for swap dealers failing to comply with Group A Requirements when swaps take place in a jurisdiction other than the UK or the Six Jurisdictions, the aggregate notional amount of all the swap dealer’s foreign branches in foreign jurisdictions other than the UK or the Six Jurisdictions doesn’t exceed 5% of the swap dealer’s aggregate notional swap value, the swap dealer complies with the swap requirements applicable within that foreign jurisdiction, and the swap dealer maintains records verifying that its swap activity in foreign jurisdictions is below the 5% threshold and it addresses any significant risk.

Notably, although the CFTC staff expanded the jurisdictions the CFTC’s 2013 guidance could apply to through this no-action letter, the CFTC staff calls out that Group B Requirements AREN’T eligible for substituted compliance when entering swaps within the UK because the CFTC has issued a comparability determination. So a swap dealer must apply the Group B Requirements to swaps in the UK, or include them in the 5% when calculating aggregate notional swap values.