Key Takeaways
- The CFTC’s no-action relief allows market participants to use the 2020 Cross-Border Rule’s definitions of “U.S. person” and “guarantee” for swap regulatory requirements governed by older, inconsistent definitions.
- This relief eliminates the need to reclassify counterparties or collect new representations when the safe harbor for prior representations expires after December 21, 2027.
- Investment managers may now refer to a single, harmonized set of U.S. person definitions for cross-border swap regulatory requirements when making status representations to swap dealers (SDs) or major swap participants (MSPs), reducing compliance burdens for SDs and MSPs and aligning CFTC practice with the SEC.
- The no-action relief also allows market participants to disregard the “conduit affiliate” concept for certain requirements.
- This position will remain in effect until the CFTC adopts new rules addressing the relevant cross-border definitions, or the no-action letter is withdrawn.
The Commodity Futures Trading Commission (CFTC) has released No-Action Letter 25-42, addressing long-standing compliance challenges created by multiple, overlapping definitions of “U.S. person” and “guarantee” in the CFTC’s cross-border swap framework. The relief allows market participants, including investment managers, to rely on a single, harmonized set of definitions for certain swap regulatory requirements.
Background
The regulation of cross-border swaps under the Commodity Exchange Act (CEA) has long been complicated by multiple, overlapping definitions of “U.S. person” and “guarantee.” These definitions appear in the CFTC’s 2013 Cross-Border Guidance, the Cross-Border Uncleared Margin Rule (2016), and the 2020 Cross-Border Rule, and they differ in scope and application (available here).
For example, the 2013 Guidance included a broad “U.S. person” definition with prongs for majority-owned funds and “conduit affiliates,” while the 2016 and 2020 rules narrowed these definitions and eliminated certain categories. As a result, SDs, MSPs, and their counterparties have been required to classify entities under multiple, sometimes conflicting, standards, leading to repeated requests for representations and increased operational complexity.
CFTC No-Action Relief
In response to industry requests, the CFTC’s Market Participants Division, Division of Clearing and Risk, and Division of Market Oversight have issued No-Action Letter 25-42, providing that, until further notice, CFTC staff will not recommend enforcement action against any person that:
- Uses the 2020 Cross-Border Rule’s definitions of “U.S. person” and “guarantee” for swap regulatory requirements still technically governed by the 2013 Guidance or the Cross-Border Uncleared Margin Rule. For counterparties that are investment funds, the 2020 Rule defines a U.S. person to include a 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. For this definition, a principal place of business generally means the location from which the entity’s officers, partners, or managers primarily direct, control, and coordinate its activities, and for an externally managed investment vehicle, this location is the office from which the manager directs, controls, and coordinates the vehicle’s investment activities.
- Continues to rely on prior counterparty representations for regulatory requirements where the 2020 Rule superseded the 2013 Guidance but the counterparty’s representations were made before the effective date of the 2020 Rule, even after the expiration of the safe harbor after December 21, 2027.
- Disregards the “conduit affiliate” concept for purposes of the requirements that previously referenced it.
This relief supersedes prior no-action letters to the extent they are inconsistent with the new positions.
What Hasn’t Changed
The CFTC’s rules and regulations include several other variations on a “U.S. person” definition, or comparable legal concepts, that remain unaffected by this no-action relief. Of note for investment managers, “United States Person” under CFTC Rule 4.7 (which provides exclusions from the pool definition and partial disclosure, reporting, and recordkeeping relief for registered commodity pool operators and commodity trading advisors) and “Foreign Located Person” under CFTC Rule 3.10 (which provides registration exemptions based on a non-U.S. nexus) remain unchanged.
Similarly, the CFTC’s long-standing joint guidance with the Securities and Exchange Commission (SEC) on restrictions for offering certain nondomestic futures, options, and index products to U.S. customers continues to apply and must be considered separately.
Implications for Investment Managers
- Simplified Representations. Investment managers may now refer to a single, harmonized set of definitions for “U.S. person” and “guarantee” across CFTC cross-border swap regulatory requirements.
- Operational Efficiency. The relief streamlines onboarding and ongoing compliance with Dodd–Frank.
- Regulatory Alignment. The CFTC’s approach is now more closely aligned with the SEC, reducing complexity and cost for SDs and MSPs, and their counterparties.
- Prior Representations. Representations made before the effective date of the 2020 Cross-Border Rule where that Rule supersedes the 2013 Guidance need not be updated unless and until the CFTC adopts new rules.
Industry Next Steps
This no-action letter should ease regulatory burdens and complexity for SDs and MSPs, and market participants engaging in cross-border swap activity, including investment managers. Market participants should continue to follow future CFTC rulemaking that may supersede or supplement this no-action position.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.
You can subscribe to future advisories and other Alston & Bird publications by completing our publications subscription form.