On May 20, 2025, two divisions within the Commodity Futures Trading Commission (“CFTC”) — the Market Participants Division (“MPD”) and the Enforcement Division (“DOE”) — released procedures providing guidance on how the divisions will address potential non-compliance issues under foreign law.
The MPD and the DOE (collectively, the “Divisions”) have released procedures outlining guidance regarding the referral processes for determining when a non-U.S. Swap Entity or a Foreign Branch of a U.S. Swap Entity are not in compliance with comparable U.S. Standards. These procedures are intended to be read in conjunction with a CFTC Staff letter, CFTC Letter No. 25-13 (the “Staff letter”) released on April 17, 2025. The Staff letter outlines the factors the Divisions must consider when determining whether a violation or non-compliance issue is material.
Relevant Background
To align with the global swap market, the CFTC recognized that jurisdictions outside of the U.S. may implement foreign regulatory requirements that are comparable to and as comprehensive as those required by the United States under the Commodity Exchange Act. The CFTC thereafter adopted a Substituted Compliance regime that applies to Swap Entities who also must abide by the Substituted Compliance Rules.
The Substituted Compliance Rules permit a non-U.S. Swap Entity or a foreign branch of a U.S. Swap Entity to satisfy the CFTC’s requirements through Substituted Compliance. But, if such an entity fails to comply with the foreign jurisdiction’s requirements, the CFTC may initiate an action under the CFTC’s corresponding requirements. The procedure outlines how the Divisions will proceed against Swap Entities they suspect are in violation of Substituted Compliance.
Procedures
Under the new procedures, where either Division has reason to believe a Swap Entity relying on Substituted Compliance is materially not in compliance with the comparable foreign standard, MPD will confer with the Swap Entity’s relevant foreign regulator. There are three scenarios that may result upon such a conference.
First, when the foreign regulator determines the Swap Entity is in compliance, both Divisions will close their inquiry.
Second, if the foreign regulator determines the Swap Entity is not in compliance, the MPD will investigate whether the foreign regulator seeks to take enforcement, supervisory, or other action. MPD will not make a referral to the DOE so long as the foreign regulator is considering possible action. Ultimately, if the foreign regulator is satisfied that it has pursued appropriate remedial action, MPD will not refer the matter to DOE.
However, the procedure provides that DOE may, even when a foreign regulator is satisfied with its remedial action, recommend enforcement where exigent or extraordinary circumstances exist. Such exigent circumstances include, the “loss of U.S. customer or counterparty funds that may be recovered by a Commission enforcement action,” or “imminent or ongoing harm to orderly trading on a U.S. trading or execution facility or U.S. financial stability.” Absent these exigent circumstances, the DOE will not recommend enforcement on behalf of the CFTC.
Third, in the circumstance where a foreign regulator has not finally determined compliance, the MPD will not make a referral to DOE and DOE will not recommend an enforcement action. If the foreign regulator determines it will not make a final determination on compliance, the Divisions will proceed as though the entity is in compliance with foreign law and will close their inquiry.
Staff Letter
The Staff letter supplements these procedures. Namely, it explains that the Divisions may refer violations to the DOE that are material. A material violation is a violation that causes harm to clients, counterparties, customers, members, market integrity, or that causes significant financial losses. The Divisions apply a reasonableness standard when determining materiality, considering the following factors:
For supervision and compliance issues that are non-material, the relevant Divisions will address these issues with the entity directly, without referral to the DOE.
Resources:
CFTC Procedure
CFTC Staff Letter
[View source.]
