Direct and Significant Connections: CFTC Provides Guidance on Extraterritoriality

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On June 29th, the CFTC published a proposed policy statement and interpretive guidance addressing the extraterritorial reach of the swaps provisions of the Commodity Exchange Act ("CEA") that were enacted by Title VII of the Dodd-Frank Act. The foreign banking community and U.S. banks with overseas operations have been waiting for this guidance for quite some time. International banks headquartered outside the United States that engage in swaps activities in the United States have been particularly concerned about U.S. regulation of activities that are more properly supervised and regulated by home country, and not host country, regulators. Further, uncertainty regarding which entities must register as swap dealers or major swap participants, and the extent to which entity level and transaction level requirements would apply to registrants, have hindered the efforts of foreign banks to address their derivatives business and to engage in compliance planning.

The interpretive guidance is open for comment for a 45-day period following Federal Register publication. In large measure, the guidance follows the broad concepts that Chairman Gensler outlined in a June 14th speech before the Institute of International Bankers. While noting that corporate structures and inter-affiliate obligations may cause swaps activity, “regardless of where that activity takes place, to have a direct and significant connection with activities in, or effect on, commerce in the U.S.”, Chairman Gensler indicated that the guidance would take into account the comments provided to the CFTC and the SEC on extraterritoriality by the foreign banking community.

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