The Commodity Futures Trading Commission (the “CFTC”) has issued a rule jointly with the Securities Exchange Commission further defining the term “swap” and “security-based swaps”. In that rule, CFTC has taken the view that the guarantee of a swap is itself a “swap” for purposes of the Commodity Exchange Act, as amended (“CEA”), including by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Under the CEA it is illegal for any person other than an “eligible contract participant” (“ECP”) to enter into a swap unless the swap is entered into on, or subject to the rules of, a board of trade designated by the CFTC as a contract market. As a result, the guarantee of a swap by a guarantor that is not an ECP even if the direct counterparty to the swap is an ECP—raises significant issues. The CFTC is asserting broad jurisdiction, even extra-territorially, so caution needs to be applied even where the swap provider and/or its counterparty are not US persons.
Under many secured loan facilities, swaps entered into by a borrower (or one of its subsidiaries) benefit from the same credit support as the direct obligations under the loan facilities, including security and guarantees from the borrower group. Under the CEA, if any member of the borrower group which provides a guarantee or security of a swap is not an ECP, then the guarantee of the swap by such subsidiary would not be enforceable. Amendments to existing swaps and/or guarantees may raise similar issues in this respect.
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