On July 26, 2013, the Commodity Futures Trading Commission (“CFTC”) published its “Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations” (“Interpretive Guidance”). The Interpretive Guidance details the circumstances in which CFTC will assert jurisdiction over swap transactions that occur outside of the United States.
Parties to swap transactions which are subject to CFTC rules can use one or both of the ISDA August 2012 DF Protocol and the ISDA March 2013 DF Protocol (the “Dodd-Frank Protocols”) to assist their compliance efforts. However, where certain elements of a swap transaction occur outside of the US, the CFTC has stated that it will only require compliance with a more limited set of the requirements. As such, not all aspects of the Dodd-Frank Protocols will be relevant. Accordingly, on 15 November 2013, ISDA published its Non-U.S. DF Agreement. The Non-U.S. DF Agreement is only applicable to parties which have not already adhered to the Dodd-Frank Protocol and where:
- one party is either a:
- non-US swap dealer; or
- US bank that is a swap dealer and transacts exclusively out of non-US branches, and
- the counterparty is a non-U.S. person (including a person guaranteed by a U.S. person or acting as an “affiliate conduit” for purposes of the Interpretive Guidance).
The Non-U.S. DF Agreement allows these parties to bilaterally amend swap documentation in order to address solely those CFTC requirements which are relevant based on the Interpretive Guidance. Specifically, the parties can agree that only “Entity-Level Requirements” or “Category A” “Transaction-Level Requirements” will apply.
The Non-U.S. DF Agreement is structured as a modular agreement with three parts:
- a “base” agreement;
- Annex I; and
- Annex II.
Annex I addresses “Entity-Level Requirements”, such as swap reporting and record-keeping requirements, whereas Annex II addresses “Category-A Transaction-Level Requirements”, such as swap trading relationship documentation, clearing, agreed swap valuation processes and portfolio reconciliation. The base agreement functions primarily as a “wrapper” for the two Annexes. Notably, the Non-U.S. DF Agreement does not reproduce representations regarding status as a US Person contained in the Cross-Border Swaps Representation Letters recently published by ISDA as it is assumed that the parties using the Non-U.S. DF Agreement have already established their respective statuses under the Interpretive Guidance.
The Non U.S. DF Agreement also addresses certain “substituted compliance” aspects of cross-border regulation, specifically with respect to the provision of daily valuations and portfolio reconciliation under EMIR, allowing market participants which are subject to Article 11 of EMIR to comply with those requirements instead of CFTC regulations. In addition, the Non-U.S. DF Agreement can be further tailored for those counterparties operating in jurisdictions which have been recognized by the CFTC as comparable to its own for purposes of “substituted compliance”.
 The Non-U.S. DF Agreement does not include “Category-B Transaction-Level Requirements” as the Interpretive Guidance does not generally require compliance with those requirements by the above parties.