© 2015 Dechert LLP

Regulation of Swaps under Dodd-Frank

Implications for French Asset Managers

Presentation to The Association Française de la Gestion Financière

Julien BourgeoisPhilip Hinkle

June 4, 2015

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Presenters

Julien BourgeoisPartner, Washington DC+1 202 261 3451 julien.bourgeois@dechert.comBio: http://www.dechert.com/julien_bourgeois/

Philip HinkleAssociate, Washington DC+1 202 261 3460 philip.hinkle@dechert.comBio: http://www.dechert.com/philip_hinkle/

1900 K Street, NWWashington, DC 20006

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Agenda

Dodd-Frank, Jurisdiction of CFTC and SEC and Regulated Products

Swap Dealer and Major Participant Swap Registration

Overview of CFTC and SEC Swap Trading Rules

Application of Swaps Rules to Non-U.S. Asset Managers

– SEC and CFTC U.S. Person Definitions

– CFTC’s Substantive Guidance

Detailed Review of CFTC Swap Trading Rules

Overview of Dodd-Frank Protocols

June 4, 2015

June 4, 2015

Dodd-Frank, Jurisdiction of CFTC and SEC and Regulated Products

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Dodd-Frank Act Title VII

First comprehensive U.S. regulatory framework for swaps markets

Part of a global de-risking through regulation underway since the 2008 financial crisis

Aims to prevent future crisis through transparency and reduction of structured leverage and systemic risk

June 4, 2015

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Dodd-Frank Act Initiatives

Swap clearing and transparent exchange trading for standardized swaps to reduce counterparty risk and enhance price discovery

Registration and substantive regulation and oversight of swap dealers and major swap participants

Capital and margin requirements to reduce leverage in the markets

Recordkeeping and reporting for swaps to increase market surveillance capability and market transparency

June 4, 2015

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Dodd-Frank Act Swaps Jurisdiction

U.S. Securities and Exchange Commission (SEC) has jurisdiction over "security-based swaps" under the U.S. Securities Exchange Act of 1934 (Exchange Act)

U.S. Commodity Futures Trading Commission (CFTC) has jurisdiction over all other "swaps" under the U.S. Commodity Exchange Act (CEA)

June 4, 2015

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CFTC and SEC Jurisdiction

New "Swaps"- Swaps on broad-based

security indices - Swaptions

- Options on interest rates, currencies, commodities- Many forward contracts

- Cash settled FX swaps and FX forwards

Already Regulated- Commodity and broad-

based index futures- Options on futures

- Options on commodities

New "Swaps"- "Security-based Swaps"

(on single security and narrow-based security

indices)Already Regulated

-Stocks- Bonds

- Options on securities and security indices

New"Mixed Swaps"AlreadySingle

stock and narrow-based index

futures

Commodity Interests subject to CFTC

JurisdictionSecurities subject

to SEC Jurisdiction

Joint CFTC/SEC Jurisdiction

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CFTC-Regulated

Swaps

Non-Swaps

Deliverable FX Forwards X*

Non-Deliverable FX Forwards X

Deliverable FX Swaps X*

Non-Deliverable FX Swaps X

FX Options X

Off-Exchange Retail FX Options X**

FX Options Traded on a Securities Exchange X***

Cross-Currency Swaps X

*Subject to CFTC reporting requirements and external business conduct standards (covered by DF Protocol 1.0)**Regulated under CFTC retail forex regime***Securities that are regulated by SEC

New CFTC-Regulated Swaps – Foreign Exchange (FX) Products

June 4, 2015

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CFTC-Regulated

Swaps

Non-Swaps

Forward Rate Agreements X

Swaptions X

Forward Swaps X

Mixed Swaps X

Contracts for differences on individual securities or narrow-based security indices

X*

Contracts for differences on commodity interests, including broad-based security indices

X

*Security-based swaps that are regulated by SEC

New CFTC-Regulated Swaps – Examples of Other Products

June 4, 2015

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CFTC-Regulated Swaps

Non-Swaps

Guarantees of Swaps X

Insurance Products that meet "product" and "provider" limits

X*

Consumer Transactions that are not typical derivatives trades

X**

Commercial Transactions that are not typical derivatives trades

X**

Loan Participations X***

Forward Contracts in Nonfinancial Commodities

X****

*Regulated by state insurance regulators**Regulated under consumer / commercial laws***Regulated as a security or bank product depending on facts****Excluded from CFTC regulation under "forward contract exclusion"

New CFTC-Regulated Swaps – Examples of Other Products

June 4, 2015

June 4, 2015

Swap Dealer and Major Swap Participant Registration

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CFTC-Regulated Swap Dealer

A swap dealer is an entity that:

– holds itself out as a dealer in swaps; or

– makes a market in swaps; or

– regularly enters into swaps with counterparties as an ordinary course of business for its own account; or

– engages in any activity causing the entity to be commonly known in the trade as a dealer or market maker in swaps

Under a de minimis exclusion, an entity is not a swap dealer if the gross notional value of its positions over the preceding 12 months:

– in CFTC-regulated swaps, is no more than $8 billion; and

– in transactions where the counterparty is a "special entity" (federal agency; state, state/municipality; ERISA plan or U.S. governmental plan; or endowment), is no more than $25 million

We are not aware of asset managers that are swap dealersJune 4, 2015

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CFTC-Regulated Major Swap Participant ("MSP") A MSP is an entity that is not a swap dealer and that:

Substantial Position: Maintains a substantial position in any major swap category

– interest rate: $3 billion outward exposure or $6 billion outward exposure + potential exposure;

– credit, equity and commodity: $1 billion outward exposure or $2 billion outward exposure + potential exposure OR

Substantial Counterparty Exposure:

– The entity’s outstanding swaps create "substantial counterparty exposure that could have serious adverse effects on the financial stability of the banking system or financial markets", meaning having aggregate swap positions of

$5 billion in daily average aggregate uncollateralized outward exposure; or

$8 billion in daily average aggregate uncollateralized outward exposure + daily average aggregate potential outward exposure OR

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CFTC-Regulated MSP (cont’d)

Highly Leveraged Financial Entity:

– The entity has an equity ratio of 12 to 1 and maintains a substantial position in swaps and

– There are safe harbors available

We have not seen asset managers or funds have to register as MSPs

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SEC Registration Regime

The SEC’s definition for security-based swap dealer is substantially identical to the CFTC’s

The SEC’s definition for MSBSP is substantially identical to the CFTC’s

We are not aware of asset managers that are expected to be SBSDs or MSBSPs

June 4, 2015

June 4, 2015

Overview of CFTC and SEC Swap Trading Rules

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Implementation

The CFTC has adopted most rules mandated by Dodd-Frank

The SEC has adopted a U.S. Person definition and reporting and public dissemination and swap data repository rules under Reg SBSR and Reg SDR; compliance dates are yet to be adopted

The SEC has not yet adopted the majority of the other mandated rules relating to security-based swaps

SEC requirements relating to mandatory clearing, trade execution and other matters will be addressed in future SEC rulemakings

June 4, 2015

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CFTC "Entity-Level" Swap Requirements Impact applicable entities without distinction as to

counterparty or location of swap

Category 1

– Capital adequacy (not implemented)

– Chief Compliance Officer

– Risk management

– Swap data recordkeeping

Category 2

– Swap Data Repository ("SDR") reporting

– Swap data recordkeeping relating to complaints and marketing and sales research

– Large trader reporting (apply to all "large traders" of CFTC-regulated swaps)

June 4, 2015

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CFTC "Transaction-Level" Swap Requirements Apply to all CFTC-regulated swaps

Category A (ISDA March 2013 DF Protocol 2.0)

– required clearing and swap processing (i.e., prompt submission)

– margin (not finalized) and segregation requirements for uncleared swaps

– trade execution (exchange trading)

– swap trading relationship documentation

– portfolio reconciliation and compression

– real-time public reporting

– trade confirmation

– daily trading records

Category B – External Business Conduct Rules requiring swap dealer due diligence on counterparty eligibility, disclosures, suitability determination / safe harbor (ISDA August 2012 DF Protocol 1.0)

June 4, 2015

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SEC Security-Based Swap Rules The SEC adopted two sets of rules under Dodd-Frank relating to swap

data reporting in March 2015

– registration of security-based SDRs and the duties and core principles relating SDRs

– required reporting of security-based swap information to SDRs

– required public dissemination of transaction, volume and pricing info by SDRs

– generally assign reporting requirements to registered counterparties

– substantially similar to the CFTC’s rules relating to SDR reporting

SEC requirements relating to mandatory clearing, trade execution, regulatory reporting, and public dissemination will be addressed in future SEC rulemakings

The SEC has not indicated the timing for the adoption of the remaining substantive rules

June 4, 2015

June 4, 2015

Application of Swaps Rules to Non-U.S. Asset Managers – SEC and

CFTC U.S. Person Definitions

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U.S. Regulation of Non-U.S. Swap Activities

The CEA and Exchange Act each set forth standard for extraterritorial regulation of swaps

Section 2(i) of the CEA: CEA swap provisions generally do not apply to swap activities outside of the U.S. unless such activities:

– have a direct and significant connection with activities in, or effect on, commerce of the U.S., or

– contravene CFTC rules preventing the evasion of the CEA swap provisions

Section 30(c) of the Exchange Act: No Exchange Act security-based swap provisions will apply to a person conducting security-based swaps transactions outside of the jurisdiction of the U.S. unless such person transacts such business in contravention of SEC rules preventing the evasion of the SEC security-based swap provisions

June 4, 2015

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CFTC Cross-Border Guidance

July 2013: CFTC adopted "cross-border guidance" to implement Section 2(i) providing:– a definition of "U.S. Person" with respect to the application of the

CEA and CFTC swap provisions

– which non-U.S. entities are required to register as swap dealers and MSPs

– that the CFTC’s entity-level requirements apply to non-U.S. person CFTC-registered swap-dealers and MSPs

– when the CFTC’s transaction-level requirements apply to transactions involving non-U.S. persons

June 4, 2015

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CFTC U.S. Person Definition prong (i): natural person resident in the United States;

prong (iii): legal entity (including any collective investment vehicle) that (a) is organized in the U.S. or (b) has its principal place of business in the U.S.;

prong (iv): pension plan for the employees, officers or principals of a U.S. legal entity described in prong (iii) unless the pension plan is primarily for foreign employees of such entity;

prong (vi): collective investment vehicle that is a commodity pool and not described in prong (iii) that is directly or indirectly majority-owned by U.S. persons except a collective investment vehicle that is publicly offered only to non-U.S. persons and not offered to U.S. persons;

prong (viii): any individual account or joint account directly or indirectly owned by U.S. person(s)

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CFTC U.S. Person Definition – Principal Place of Business of Separate Accounts Analysis of whether a fund or other advisory client is a U.S.

person is based on the facts and circumstances and the "economic reality" of the arrangement

Whether a legal entity (other than a fund) has its "principal place of business" in the U.S. is a question of whether the non-U.S. entity has its "center of direction, control, and coordination of [its] business activities in the United States"

"In practice, it should normally be the place where the [entity] maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination, i.e., the nerve center, and is not simply an office where the corporation holds its board meetings"

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CFTC U.S. Person Definition – Principal Place of Business of Funds Primary focus: The location of the investment managers, fund sponsors

and promoters, and related sales and trading desks, or the "actual center of direction, control and coordination" (i.e., the "nerve center") of the fund

The CFTC will focus primarily on where senior personnel are located

The CFTC will generally consider a vehicle’s principal place of business to be in the U.S. if its senior principal personnel responsible for the following are in the U.S., depending on the facts and circumstances:

– the "formation and promotion" of the vehicle or

– the "implementation of the vehicle’s investment strategy"

The location of the fund’s registered officer or board of directors generally is not considered (directors are not implementing the investment objectives of funds and so would not be viewed as "key personnel")

June 4, 2015

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CFTC U.S. Person Definition – Principal Place of Business of Funds – U.S. Sub-Advisers and PMs A fund is not a U.S. person where some investment personnel or

an independent, hired sub-adviser’s personnel are located in the United States

Such persons must report to non-U.S. persons who are considered to be fulfilling the "key functions relating to [the vehicle’s] formation or the achievement of its investment objectives"

CFTC examples distinguish between PMs that "facilitate" implementation (even where acting autonomously day-to-day) and personnel of the manager that directs / implements the fund’s high level strategy

So, a non-U.S. vehicle is not a U.S. person solely because it employs a U.S. PM or CTA if the PM or CTA functions under the direction of senior personnel located outside of the United States

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CFTC U.S. Person – Exchange-Traded Fund Exception

Exception for a collective investment vehicle from majority ownership rule if (i) publicly offered outside of the United States (ii) only to non-U.S. persons and (iii) not offered to U.S. persons

This is a distinction from definitions of the SEC (Reg S), the IRS, and the CFTC for CPO/CTA regulation (Rule 4.7)

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Sample U.S. Person Analysis 1

Non-U.S. asset manager organizes a fund in the U.S.

Fund is a U.S. person under prong (iii)(a) as it is organized in the U.S.

No need to consider prong (vi) analysis of fund ownership

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Sample U.S. Person Analysis 2 Non-U.S. asset manager organizes a fund outside of the U.S. and

personnel of manager located outside of the U.S. have primary responsibility for implementing the fund’s objective and strategies

Less than a majority of investors are U.S. persons

Fund is sub-advised by a U.S. asset manager

Because the fund is not owned by a majority of U.S. persons, the fund does not trigger U.S. person status under prong (vi)

Fund likely is not a U.S person under prong (iii)(b) because senior personnel responsible for sponsoring the fund and implementing its strategy are not in the U.S. (absent potential compelling facts and circumstances)

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Sample U.S. Person Analysis 3 Non-U.S. asset manager organizes a fund outside the U.S. and

non-U.S. personnel of manager have primary responsibility for implementing the fund’s objective and strategies

Less than a majority of investors are U.S. persons and sales activity does not occur in the U.S.

Personnel in Non-U.S. manager’s U.S. office are responsible for stock selection on an autonomous basis subject to direction and high-level oversight by higher-level non-U.S. personnel

Because the fund is not owned by majority of U.S. persons, fund does not trigger U.S. person status under prong (vi)

The Fund likely would be able to determine it is not a U.S. person under prong (iii) in light of the facts and circumstances

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Sample U.S. Person Analysis 4 U.S. asset manager organizes a fund outside of the U.S. and

personnel of manager located within the U.S. have primary responsibility for implementing the fund’s objective and strategies

Less than a majority of investors are U.S. persons

Fund is sub-advised by a non-U.S. asset manager

Because the fund is not owned by a majority of U.S. persons, the fund does not trigger U.S. person status under prong (vi)

Fund likely is a U.S person under prong (iii)(b) because senior personnel responsible for sponsoring the fund and implementing its strategy are located in the U.S. (absent potential compelling facts and circumstances)

June 4, 2015

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Sample U.S. Person Analysis 5 U.S. asset manager organizes a fund outside the U.S.

Fund is sold primarily to non-U.S. investors and Fund sales force is located outside the U.S.; some investors (less than a majority) have moved to the U.S. and are "U.S. persons"

Fund managed by non-U.S. affiliate that has personnel with primary responsibility for the fund’s objective and strategies under the fund’s organizational documents outside of the U.S.; Manager uses U.S. affiliate’s trading desk for transactions in U.S. holdings (40% of portfolio)

Investment decisions are reviewed by the investment committee or top level asset management organization (not U.S. residents)

Because the fund is not owned by majority U.S. persons, fund does not trigger U.S. person status under prong (vi).

The Fund may also be able to determine it is not a U.S. person under prong (iii) in light of the facts and circumstances

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SEC U.S. Person Definition

In July 2014, the SEC adopted final rules on the definition of the term "U.S. person" for purposes of applying SEC security-based swap rules to cross-border security-based swap activity

The SEC U.S. person definition includes:

– any natural person residing in the United States;

– any partnership, corporation, trust, investment vehicle, or other legal person organized, incorporated, or established under the laws of the United States or having its principal place of business in the United States; and

– any account (whether discretionary or non-discretionary) of a U.S. person

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SEC U.S. Person Definition (cont’d)

Similar to the CFTC definition, the SEC will consider the "the location from which the officers, partners, or managers of the legal person direct, control, and coordinate the activities of the legal person"

This specifically considers the "office from which the manager of the vehicle primarily directs, controls, and coordinates the investment activities of the vehicle"

The location of personnel directing swaps activity isn’t the sole factor as the focus of the definition is on "the location of a significant portion of the entity’s financial and legal relationships"

Does not consider impact of effecting trades in the U.S.

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Differences in the CFTC and SEC U.S. Person Definitions Principal place of business analysis (above)

The SEC definition does not contain a carve-out for pension plans

– a pension plan for a non-U.S. company that is advised by a U.S. asset manager could be deemed to have its principal place of business in the United States and thus be a U.S. person for SEC but not CFTC purposes

Beneficial ownership of a collective investment vehicle by U.S. persons is not a factor under the SEC definition

June 4, 2015

June 4, 2015

Application of Swaps Rules to Non-U.S. Asset Managers – CFTC’s

Substantive Guidance

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Cross-Border Application of CFTC Entity-Level Requirements

The CFTC’s entity-level requirements apply to CFTC registrants as follows:

2 June 2015

U.S. swap dealer or MSP (including an affiliate or such entity acting through a foreign branch)

Category 1** and Category 2*** Apply

Non-U.S. swap dealer or MSP (including an affiliate of a U.S. Person)

Category 1: Substituted Compliance* Category 2: Apply for U.S. counterparties; Substituted Compliance* for SDR Reporting with non-U.S. counterparties that are not guaranteed or conduit affiliates of U.S. persons

Non-U.S. person not registered as swap dealer or MSP

Category 1 and Category 2: Not Applicable

*Substituted Compliance applies upon "comparability determination" of CFTC (see below)**Capital adequacy, Chief Compliance Officer, Risk management, Swap data recordkeeping***SDR reporting, recordkeeping (complaints and marketing and sales research), Large trader reporting (

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Cross-Border Application of CFTC Transaction-Level Requirements

Sell Side

Buy Side

U.S. Person Foreign Branch of U.S. Bank that is a SD or MSP

Non-U.S. Person Guaranteed by, or Affiliate Conduit of, a U.S. Person

Non-U.S. Person NOT Guaranteed by, and NOT an Affiliate Conduit of, a U.S. Person

U.S. Person SD or MSP A** and B***: Apply

A and B: Apply A and B: Apply A and B: Apply

U.S. Person SD or MSP (when it solicits and negotiates through a foreign subsidiary or affiliate)

A and B: Apply A: ApplyB: Do not Apply

A: ApplyB: Do not Apply

A: ApplyB: Do not Apply

Foreign Branch of U.S. Bank that is a SD or MSP

A and B: Apply A: Substituted Compliance*B: Do not Apply

A: Substituted ComplianceB: Do not Apply

A: Substituted ComplianceB: Do not Apply

Non-U.S. Person SD or MSP (including an affiliate of a U.S. Person)

A and B: Apply A: Substituted ComplianceB: Do not Apply

A: Substituted ComplianceB: Do not Apply

A and B: Do Not Apply

*Substituted Compliance applies upon "comparability determination" of CFTC (see above)**Category A: Clearing & processing, margin & segregation, exchange trading, documentation, portfolio reconciliation and compression, real-time public reporting, confirmation, daily trading records***Category B: Business conduct rules (e.g., counterparty eligibility, disclosures, suitability determination / safe harbor)

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CFTC Substituted Compliance: Transaction-Level Comparability Determinations and Relief (EU) Initial comparability determinations on December 20, 2013 for EU SDs:

– swap trading relationship documentation – Comparable with conditions

– portfolio reconciliation and compression – Comparable

– trade confirmation – Comparable

– daily trading records – Comparable with condition to maintain pre-execution information

No comparability determination for (i) clearing and swap processing, (ii) exchange trading, (iii) margining (not finalized) and segregation for uncleared swaps, or (iv) real-time public reporting, so a transaction of an EU asset manager’s clients with a U.S. person swap dealer could be subject to both the U.S. and EU requirements (e.g., reporting)

No-action relief from trade execution for various categories of package trades through 2015 and 2016 (Letter 14-137)

No-action relief from trade execution requirements on February 12, 2014 for certain transactions on EU Multilateral Trading Facilities through effective date of CFTC rules (if adopted) (Letter 14-16)

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CFTC and EU Swaps Clearing Rules The CFTC and the European Commission ("EC") have been at

"loggerheads" over whether to recognize each other’s mandatory clearing regimes governing central counterparty clearinghouses as equivalent (dispute over required margin methodologies)

If recognized as equivalent by both jurisdictions, a fund based in Europe trading with a U.S. swap dealer and required to clear its swaps through a U.S. clearinghouse would satisfy its obligations under the European clearing requirements by doing so

If they do not, European sell side firms that are subject to EU capital requirements and that clear through U.S. clearinghouses may have to significantly increase the capital they are required to hold (i.e., margin they charge their clients) to protect against default. The new EU capital requirements will become effective June 15, 2015 (if not delayed)

There is also a question as to whether the CFTC and EC will coordinate what OTC swaps will be subject to mandatory clearing

June 4, 2015

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CFTC November 2013 Advisory The CFTC staff issued an advisory statement on November 14, 2013 that

would apply the CFTC’s transaction-level requirements to swaps of non-U.S. registered SDs with other non-U.S. persons if the swaps are arranged, negotiated, or executed by personnel or agents of the non-U.S. swap dealer located in the U.S. (“one elevator rule”)

Compliance with the one elevator rule is delayed through the earlier of September 15, 2015 or the effective date of any CFTC action on the advisory (e.g., Letters 14-74 and 14-140)

The CFTC requested and is currently reviewing comments on the staff advisory

The SEC issued a corresponding proposed rule on April 29, 2015 that would apply only SEC reporting and public dissemination and external business conduct standards to security-based swaps transactions where a non-U.S. SBSD uses U.S. personnel to arrange, negotiate or execute a transaction

If effective, the CFTC advisory and SEC rules may cause non-U.S. buy side participants with non-U.S. dealers to need to comply with certain U.S. rules

June 4, 2015

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Managing Exposure to U.S. Swaps Rules

Certain CFTC swaps rules may cover EU asset managers to:

– foreign funds that might now be considered U.S. persons for purposes of the swap provisions and

– funds that are not U.S. persons but trade swaps with

U.S. person swap dealer

U.S. person swap dealer’s foreign branch, affiliate or subsidiary, or

a non-U.S. person swap dealer conducting activities in the U.S. under "one elevator" policy

Avoid CFTC swaps rules by limiting activities

Compliance with CFTC swaps rules

June 4, 2015

June 4, 2015

Detailed Review of CFTC Swap Trading Rules

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CFTC Swap Clearing Requirement The CFTC is required to designate swaps as subject to

mandatory clearing in response to requests from a derivatives clearing organization ("DCO")

Currently, the following categories of swaps are subject to mandatory clearing by the CFTC under Dodd-Frank:

– Interest Rate Swaps ("IRS"): Basis Swaps, Fixed-to-Floating Swaps, and Forward Rate Agreements in U.S. Dollars, Euro, Pounds Sterling, and Japanese Yen, and Overnight Index Swaps in U.S. Dollars, Euro, and Pounds Sterling

– Credit Default Swaps ("CDS"): Untranched CDS on CDXNA.IG and CDXNA.HY North American Indexes and iTraxx Europe, iTraxx Europe Crossover, and iTraxx Europe HiVol

June 4, 2015

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CFTC Swap Execution Requirement

The CEA mandates that any swap that is cleared on a DCO must be traded on a board of trade designated as a "contract market" ("DCM") (i.e., historically, a futures exchange) or SEF

Exception to the swap execution requirement where (i) no DCM or SEF makes a swap "available to trade" (referred to as "MAT") or (ii) the swap transaction is subject to the end user clearing exemption

The CFTC has adopted regulations that require the designation, registration and regulation of SEFs

The CFTC has issued "made available to trade" determinations with respect to certain of the interest rate and credit default swaps noted above

June 4, 2015

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CFTC/Prudential Regulator/SEC Proposed Margin Requirements for OTC Swaps Dodd-Frank requires SEC, CFTC and U.S. prudential regulators to adopt

margin requirements for uncleared swaps

– No regulator has yet adopted final rules

– Both the prudential regulators & CFTC proposed rules in 2011 and re-proposed rules in 2014

– SEC proposed rules in 2012 with no revisions (re-proposal expected)

Responding to G20 directives, Basel Committee on Banking Supervision and IOSCO released a policy framework in 2013 intended to establish minimum requirements to guide regulators

The prudential regulators’ and CFTC’s re-proposed rules reflect the BCBS/IOSCO framework

BCBS/IOSCO suggested dates for implementation have been pushed back in their framework for margin rules since the re-proposals

June 4, 2015

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CFTC/Prudential Regulator/SEC Margin Proposed Requirements for OTC Swaps (cont’d) CFTC and prudential margin requirements proposals:

– Four categories of counterparties

– Depending on counterparty category and material swaps exposure, entity would be required to collect and post initial and/or variation margin

– No minimum margin requirement if transacting with non-financial end-users

– Variation margin would be required exclusively in cash

Variation margin calculated on a daily basis

June 4, 2015

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CFTC/Prudential Regulator/SEC Margin Proposed Requirements for OTC Swaps (cont’d)

Many industry participants laud the harmonization with guidance published in the international framework

Buy-side participants criticize re-proposal as not sufficiently conforming with international framework

– Material swaps exposure threshold

– Eligible collateral for variation margin (CFTC requires cash-only while framework requires that collateral be highly liquid able to hold value in periods of stress)

June 4, 2015

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Reporting – CFTC Swaps Reports

CFTC rules require reporting of (i) swap creation data and (ii) swap continuation data

The swap dealer entity typically satisfies all reporting requirements, meaning overlapping reporting generally does not impact the buy side

As noted above, swaps reporting is required by non-U.S. persons

June 4, 2015

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Reporting – CFTC Swaps Reports (cont’d)

Non-SD/MSPs will bear reporting responsibilities if the other counterparty is a Non-SD/MSP under one of three circumstances:

– If the swap is executed on or pursuant to the rules of a SEF or DCM and the swap is not cleared by a DCO, then the Non-SD/MSP will have to provide continuation data for the life of the swap (but will not need to provide creation data, which is reported by the SEF or DCM)

– If the swap is not executed on or pursuant to the rules of a SEF or DCM and the swap is accepted for clearing by a DCO after the applicable deadline for reporting PET data has passed, then the Non-SD/MSP must report the PET data (but does not need to provide confirmation data or any continuation data, both of which are provided by the DCO)

– If the swap is not executed on or pursuant to the rules of a SEF or DCM and the swap is not cleared, then one of the Non-SD/MSPs must assume all reporting obligations for both creation data and continuation data

June 4, 2015

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Reporting – CFTC Large Trader Reports

CFTC Regulations require that a trader who owns, holds or controls large position of exchange-traded futures and/or options and swaps, file CFTC Form 40 or Form 40S upon a special call by the CFTC

The CFTC revised CFTC Form 40 and CFTC Form 40S in November 2013 and imposed a continuing obligation on traders to update previously filed CFTC Form 40 or CFTC Form 40S as directed in the CFTC’s special call

Compliance with these rules is delayed through no-action relief until February 11, 2016 (unless no-action relief is extended)

June 4, 2015

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Reporting – CFTC OCR

The CFTC finalized its Ownership and Control Reporting rules ("OCR Rules") on November 18, 2013 for the sell side

The OCR Rules require that all FCMs and swap dealers report to the CFTC the ownership and "trading account controllers" of each entity trading in U.S. futures and options or certain U.S. swaps above certain thresholds with or through the reporting entity

The U.S. FIA established "FIA Tech" to allow reporting entities to obtain required information from their clients, and FCMs/swap dealers may request that their customers enter certain data into the FIA Tech online system to facilitate reporting by FCMs, clearing members, foreign brokers and swap dealers

Through no-action letters, compliance with the OCR Rules has been delayed until September 30, 2015, February 11, 2016 or February 13, 2017, depending on the type of form required to be submitted

June 4, 2015

June 4, 2015

Overview of Dodd-Frank Protocols

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ISDA Dodd-Frank Protocol 1.0 Facilitates the delivery of extensive "know your customer"

information from the counterparty to the SD. Additional disclosure is required for Special Entities as defined in the CFTC regulations

Party must elect applicable category of Eligible Contract Participant and (for funds) exception to "look through" to investors for off-exchange forex transactions

Provides for designation of “third party control person" and "designated evaluation agent" (typically the asset manager directing trades)

Can elect to have standard DF Terms Agreement apply if no ISDA Master to satisfy documentation requirement

June 4, 2015

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ISDA Dodd-Frank Protocol 1.0 (cont’d)

Protocol 1.0 also requires the counterparty to make a number of representations and covenants:

– to promptly notify the SD of any material change in information

– to promptly provide the SD with "any information reasonably requested" to enable the SD to comply with Dodd-Frank and related CFTC regulations

– to report certain "life cycle events" on the second business day following the day on which they occur

– to have adequate policies and procedures in place to ensure that the person (whether the adherent itself or a third-party service provider) evaluating swap recommendations and making trading decisions on behalf of the adherent is capable of doing so

– to inform SD of reporting of swaps in another jurisdiction

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ISDA Dodd-Frank Protocol 2.0 Facilitates compliance with the following Category A Transaction-

Level Requirements:

– Portfolio Reconciliation: Provides a framework for meeting the portfolio reconciliation and dispute resolution requirements in Dodd-Frank. There are two reconciliation methods. Counterparties can choose either "Review" of Portfolio Data or "Exchange" of Portfolio Data. Portfolio reconciliation under Dodd-Frank is required either annually or quarterly, based on whether the counterparty surpasses a threshold of 100 trades per quarter

– Swap Trading Relationship Documentation: SDs must have documentation in place documenting the terms that govern the trading relationship with counterparties

– Valuation and Dispute Resolution: Protocol 2.0 specifically covers valuation and dispute resolution, while other terms will typically be found in swap confirmations

– End-User Exception: Dodd-Frank provided an exception from mandatory clearing if a customer qualifies as an "end-user." Protocol 2.0 contains a number of representations for SDs to obtain the information needed to ensure regulatory compliance in lieu of clearing with these counterparties. This generally does not apply to funds

June 4, 2015

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ISDA Cross-Border Swaps Representation Letter Designed to allow swap counterparties to make representations to their

SDs to assist SDs with determining whether the CFTC will assert jurisdiction over the swap pursuant to the CFTC‘s guidance and related "U.S. person" definition.

The letter requires the counterparty to represent whether it reasonably believes that it is a U.S. person. If the counterparty represents that it is not a U.S. person, it must further represent whether it is an "affiliate conduit" (as defined by the CFTC) or has a guarantee from a U.S. person, which may also subject the swap to CFTC jurisdiction

June 4, 2015

For further information, visit our

website at dechert.com.

Dechert practices as a limited liability partnership

or limited liability company other than in Dublin and

Hong Kong.