Consistent Definitions, Less Confusion: CFTC Divisions Streamline and Harmonize Cross-Border Swap Compliance

The US Commodity Futures Trading Commission (CFTC or Commission) has taken a significant step toward regulatory clarity and harmonization in the cross-border swaps market. The CFTC’s Market Participants Division (MPD), Division of Clearing and Risk (DCR) and Division of Market Oversight (DMO, collectively with MPD and DCR, the Divisions) jointly issued No-Action Letter 25-42 (Letter 25-42) on December 9, which addresses longstanding inconsistencies in the definitions of “U.S. person” and “Guarantee” under the CFTC’s Dodd-Frank Wall Street Reform and Consumer Protection Act’s (the Dodd-Frank Act) cross-border swap framework.  

The relief in Letter 25-42 was requested by three major industry associations: the Institute of International Bankers (IIB), the International Swaps and Derivatives Association (ISDA), and the Securities Industry and Financial Markets Association (SIFMA) (collectively, IIB, ISDA and SIFMA are the Associations). The Associations argued that the existing patchwork of overlapping and slightly differing cross-border definitions created undue paperwork, confusion, and compliance burdens for market participants, and that harmonizing these definitions would promote regulatory clarity and efficiency as well as better access to US markets.

In announcing the relief in Letter 25-42, CFTC Acting Chairman Caroline D. Pham emphasized the importance of this no-action relief, stating that it “simplifies and consolidates existing no-action positions that address almost 15 years of regulatory uncertainty and promotes harmonization with Securities and Exchange Commission regulations.” The relief reflects the CFTC’s commitment to providing regulatory certainty and supporting the competitiveness of US markets.

Background: A Patchwork of “U.S. Person” Definitions

Since the implementation of the Dodd-Frank Act, market participants have faced a complex web of rules regarding the classification of counterparties as “U.S. persons” for various swap requirements. Since 2013, the Commission has issued multiple interpretations and rules. First, in 2013, the CFTC adopted its Cross-Border Final Guidance,[1] followed by the CFTC’s Cross-Border Uncleared Margin Rule in 2016,[2] and lastly codifying its interpretation in the 2020 Cross-Border Rule.[3] Each of these Commission actions introduced slightly different definitions of “U.S. person” and “guarantee,” resulting in regulatory uncertainty and increased compliance burdens for swap dealers and their counterparties.

Key Provisions of the No-Action Relief

Letter 25-42 allows market participants to rely on the definitions of “U.S. person” and “guarantee” set forth in the 2020 Cross-Border Rule for all cross-border swap requirements, including those that previously depended on the 2013 Guidance or the Cross-Border Uncleared Margin Rule. This relief applies to the classification of counterparties for swap trading, margin requirements, and other regulatory obligations.

Specifically, the no-action letter provides that:

• Unified Definitions for All Requirements. Market participants may now classify counterparties using the 2020 Cross-Border Rule’s definitions of “U.S. person” and "guarantee" for all swap requirements, including those not formally addressed by that rule, such as swap clearing, trade execution, real-time reporting, and swap data reporting.
• Continued Reliance on Prior Representations. Firms are permitted to continue relying on counterparty representations made under the 2013 Guidance or the Cross-Border Uncleared Margin Rule, even after the previous safe harbor period expires at the end of 2027. This continued reliance means that firms do not need to re-collect or update representations from their counterparties solely because the safe harbor period has ended. Previously, the expiration of the safe harbor would have required market participants to obtain new representations from all affected counterparties, which would have created a substantial administrative and operational burden. By allowing the use of existing representations, the no-action relief eliminates the need for this potentially disruptive and resource-intensive process.
• Exclusion of Conduit Affiliates. Non-US person counterparties that are "conduit affiliates" (as defined in the 2013 Guidance) do not need to be included for purposes of the unaddressed requirements, further simplifying the classification process.
• Supersedes Prior No-Action Letters. The relief provided by this new letter supersedes prior no-action letters to the extent they are inconsistent with the new position, ensuring that market participants have a clear and consolidated framework to follow.

Regulatory Impact and No Expiration

The new CFTC no-action letter fundamentally changes and simplifies how market participants may classify counterparties for cross-border swap requirements by allowing them to rely on a single, harmonized set of definitions for "U.S. person" and "guarantee" — specifically, those set forth in the 2020 Cross-Border Rule — for all cross-border swap requirements, regardless of whether those requirements were previously governed by older definitions or guidance. This represents a significant departure from the prior regime, which required market participants to navigate a patchwork of slightly different definitions found in the 2013 Cross-Border Guidance, the Cross-Border Uncleared Margin Rule and the 2020 Cross-Border Rule itself. The ability to rely on one set of definitions (and prior representations) will also help maintain efficient and competitive participation in the US swaps market. Counterparties, especially those outside the United States, are less likely to be confused or discouraged by repeated requests for updated documentation, which supports ongoing trading relationships and market stability.

Letter 25-42 does not have a fixed expiration date. Instead, the relief in Letter 25-42 will remain in effect until such time as the Commission promulgates new rules that address the disparate cross-border definitions of “U.S. person” and “guarantee” as described in the letter. The Divisions explicitly state that, both before and after December 31, 2027, they will not recommend enforcement action against any person relying on the relief. The relief will only expire upon the compliance date of future Commission rules that formally address the cross-border application of the relevant swap requirements. Therefore, the relief is open-ended and will continue until superseded by new CFTC rulemaking on this subject.