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Securities Industry and Financial Markets Association v. United States Commodity Futures Trading Commission

United States District Court, D. Columbia.

September 16, 2014


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For BETTER MARKETS, INC., Amicus: Dennis M. Kelleher, LEAD ATTORNEY, BETTER MARKETS, INC., Washington, DC.



PAUL L. FRIEDMAN, United States District Judge.

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In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (" Dodd-Frank Act" ), Pub. L. No, 111-203, 124 Stat. 1376, as a legislative response to the 2008 financial crisis. Title VII of the Dodd-Frank Act provided the United States Commodity Futures Trading Commission (" CFTC" ) with jurisdiction over the previously unregulated derivative swaps market. Congress provided that the provisions of Title VII, as well as any rules or regulations issued by the CFTC, " shall not apply to activities outside the United States unless those activities . . . have a direct and significant connection with activities in, or effect on, commerce of the United States." 7 U.S.C. § 2(i). Over the next three years, the CFTC promulgated over a dozen regulations under its Title VII authority, but did not address in those regulations the scope of their extraterritorial application under Section 2(i). On July 26, 2013, the CFTC promulgated its Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed.Reg. 45292 (July 26, 2013) (the " Cross-Border Action" ), in which it announced its policy regarding the scope of the extraterritorial applications of its so-called " Title VII Rules" pursuant to Section 2(i).

On December 4, 2013, plaintiffs Securities Industry and Financial Markets Association (" SIFMA" ), International Swaps and Derivatives Association (" ISDA" ), and the Institute of International Bankers (" IIB" )--all trade associations representing financial institutions involved in swaps dealing and trading--filed this lawsuit against the CFTC. Plaintiffs seek vacatur of the Cross-Border Action on procedural and substantive grounds, partial vacatur of the Title VII Rules, and an injunction to prevent the CFTC from applying the Title VII Rules extraterritorially in the absence of a properly promulgated regulation addressing

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the Rules' extraterritorial applications.

Now pending before the Court are the CFTC's partial motion to dismiss and the parties' cross-motions for summary judgment. Having considered the briefs and other filings of the parties and amici, the administrative record, the oral arguments presented by counsel for the parties on July 30, 2014, and the controlling law, the Court will: (1) grant the CFTC's motion to dismiss as to the Trade Execution Rule; (2) grant the CFTC's motion for summary judgment as to the Cross-Border Action and the Large Trader Reporting, Straight-Through Processing, and Clearing Determination Rules; (3) grant plaintiffs' motion for summary judgment as to the other challenged Title VII Rules; and (4) remand those Rules to the CFTC for its consideration of the costs and benefits of their extraterritorial applications.



The Commodity Exchange Act (" CEA" ) regulates the trading of commodity futures, including derivatives. Derivatives are types of " contracts deriving their value from underlying assets." Inv. Co. Inst. v. CFTC (" ICI " ), 720 F.3d 370, 372, 405 U.S.App.D.C. 366 (D.C. Cir. 2013). Derivative swaps are a particular type of derivative " in which two counterparties agree to exchange or 'swap' payments with each other as a result of such things as changes in a stock price, interest rate or commodity price." U.S. Sec. Exchange Comm'n, The Regulatory Regime for Security--Based Swaps 3 (2012), available at swaps-chart.pdf; see also 7 U.S.C. § 1a(47)(A)(ii).

The use of over-the-counter derivative swaps--swaps executed bilaterally rather than over an exchange--boomed in the 1980s and 1990s. This unprecedented growth prompted a debate over whether swaps should be regulated like other derivatives, such as futures contracts and stock options. See Inv. Co. Inst. v. CFTC, 891 F.Supp.2d 162, 171 (D.D.C. 2012), aff'd, 720 F.3d 370, 405 U.S.App.D.C. 366 (D.C. Cir. 2013).[1] In passing the Commodity Futures Modernization Act (" CFMA" ), Pub. L. No. 106-554, 114 Stat. 2763, in 2000, Congress sided with the proponents of deregulation and barred the CFTC and the United States Securities and Exchange Commission (" SEC" ) from regulating most derivative swaps markets. See 7 U.S.C. § 2(g) (2002).

The CFMA left the markets for most derivate swaps " essentially unregulated and unmonitored--effectively dark--in most respects," and those markets flourished until the 2008 financial crisis. Inv. Co. Inst., 891 F.Supp.2d at 171 (internal quotation marks omitted). The lack of transparency in over-the-counter derivative markets, which contained millions of contracts between systemically important financial institutions, " contributed significantly to th[e] crisis." Final Report of the Nat'l Comm'n on the Causes of the Fin. and Econ. Crisis in the United States at xxiv-xxv (2011), available at pdf/GPO-FCIC.pdf. While up until the mid-2000s derivatives were " generally regarded as a beneficial financial innovation that distributed financial risk more efficiently and made the financial system more stable, resilient, and resistant to shock . . . [t]he [financial] crisis essentially reversed this

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view." Inv. Co. Inst., 891 F.Supp.2d at 173 (citation omitted) (internal quotation marks omitted).

Prior to the crisis, firms had used derivatives " to construct highly leveraged speculative positions, which generated enormous losses that threatened to bankrupt not only the firms themselves, but also their creditors and trading partners." Rena S. Miller & Kathleen Ann Ruane, Cong. Research Serv., R41398, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Title VII, Derivatives 1 (2012). That the over-the-counter derivative markets " depended on the financial stability of a dozen or so major dealers" only compounded the problem: " [f]ailure of a dealer would have resulted in the nullification of trillions of dollars' worth of contracts and would have exposed derivatives counterparties to sudden risk and loss, exacerbating the cycle of deleveraging and withholding of credit that characterized the [financial] crisis." Id. Although derivative dealing " was not generally the direct source of financial weakness, a collapse of the $600 trillion dollar... derivatives market was imminent absent" the injection of " [h]undreds of billions of dollars in government credit." Id.

The over-the-counter derivative markets' contributions to the 2008 financial crisis were not limited to swaps executed on U.S. soil between U.S. counterparties. As plaintiffs recognize, " [t]he swaps market is truly global: a single swap may be negotiated and executed between counterparties located in two different countries, booked in a third country and risk-managed in a fourth country." Comment from SIFMA on Swap Entity Registration Rule, Feb. 3, 2011, at 2 (footnote omitted) (Joint Appendix (" JA" ) at 1144).

U.S.-based financial services conglomerates--like many of plaintiffs' members--operate in global swaps markets not only as direct counterparties, but also through relationships with their foreign branches, affiliates, and subsidiaries. " The modern U.S. financial services conglomerate is a U.S. parent holding company comprised of hundreds, if not thousands, of U.S. and foreign branches, affiliates, and subsidiaries." Declaration of Sayee Srinivasan, Chief Economist, CFTC (" Srinivasan Decl" ), Mar. 14, 2014 [Dkt. No. 28-2] ¶ 5. These multinational firms operate " though complex legal and operational structures ... created and maintained to efficiently serve particular purposes as part [of] the firms' overall profit-making business." Id. ¶ 16. The firms' operations through foreign subsidiaries and affiliates balance " legal, operational, tax, and accounting considerations and facilitate the [firms'] ability to serve clients in various markets around the world." Id.

Although legally distinct from their affiliates and subsidiaries, the U.S.-parent firms " routinely commingle losses and gains from U.S. and non-U.S. affiliates, subsidiaries and branches on their consolidated financial statements." Srinivasan Decl. ¶ 5. As a result, " risks taken by foreign affiliates, subsidiaries, and branches of U.S. parent companies are usually borne by the U.S. parent." Id.; see also, e.g., Declaration of Don Thompson, Managing Director & Associate General Counsel, JPMorgan Chase & Co. (" JPMorgan Decl" ), Jan. 27, 2014 [Dkt. No. 22-1] ¶ 6 (" [C]osts incurred by JPMorgan's affiliates and branches are ultimately borne by JPMorgan itself, because all are part of the same corporate group." ). Indeed, U.S. parent corporations often expressly " guarantee" the swap obligations of their foreign affiliates and subsidiaries through contracts. Srinivasan Decl. ¶ 6; see also JPMorgan Decl. ¶ 4. Under these " guarantee" provisions, the U.S. parent must

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step in and fulfill the swap obligations if the relevant foreign affiliate or subsidiary defaults on its obligations. Srinivasan Decl, ¶ 6; JPMorgan Decl. ¶ 4. These guarantees are an " integral part of the swap" because they assuage counterparty concerns that the foreign affiliate or subsidiary will be unable to meet its swap obligations. Srinivasan Decl. ¶ 6.

Several poster children for the 2008 financial crisis demonstrate the impact that overseas over-the-counter derivative swaps trading can have on a U.S. parent corporation. American International Group (" AIG" ) nearly failed because of risks incurred by the swaps trading operations in the London branch of its subsidiary, AIG Financial Products (" AIGFP" ). Srinivasan Decl. ¶ 9. Significant losses on credit default swaps entered into by AIGFP, and " guaranteed" by AIG, triggered collateral calls the companies could not meet and a liquidity crisis for both companies, Id. Similarly, Lehman Brothers Holding Inc.--a corporation that had over 3000 corporate affiliates worldwide--guaranteed the nearly 130,000 derivative contracts held by one of its London-based subsidiaries. Id. ¶ ¶ 10-11. When Lehman Brothers filed for bankruptcy in September 2008--at that time the largest bankruptcy in history with claims exceeding $300 billion--its derivative book lost over $50 billion in value. Id. ¶ 11.

While Lehman Brothers' collapse ended in bankruptcy, AIG avoided default through over $180 billion in support from the federal government. Srinivasan Decl. ¶ 9. Tens of billions of dollars of that bailout money flowed to AIG's derivative counterparties, Miller & Ruane at 5, including many of plaintiffs' members. See Brief of Better Markets, Inc. as Amicus Curiae in Support of Defendant CFTC, Mar. 19, 2014 [Dkt. No. 33] at 2 n.3 (noting that Goldman Sachs, Deutsche Bank. Socié té Gé né rale, Barclays, Merrill Lynch, and Bank of America indirectly received approximately $10.4, 9.2, 7.8, 7.0, 5.0, and 5.0 billion in payments, respectively, through the AIG bailout).

Although the global notional value of over-the counter derivatives decreased following the 2008 financial crisis, that value has crept up in the past six years and now exceeds its pre-crisis total. Miller & Ruane at 2. As of the end of 2013, the global market for over-the-counter derivatives totals over $710 trillion in notional value. Bank for Int'l Settlements. Statistical Release: OTC Derivatives Statistics at End-December 2013, at 1 (May 2014), available at


Congress responded to the 2008 financial crisis by passing the Dodd-Frank Act in 2010. Title VII of the Dodd-Frank Act gave the CFTC jurisdiction to regulate the markets for most swaps, see 7 U.S.C. § 2(a)(1)(A), and established a swaps regulatory framework intended to " reduce systemic risk . . . increase transparency, and promote market integrity within the financial system." Cross-Border Action, 78 Fed.Reg. at 45293. This framework requires entities qualifying as " swap dealers" and " major swap participants" to register with the CFTC and comply with certain statutory risk management controls. See 7 U.S.C. § § 6s(a), 6s(g), 6s(j)(2), 6s(j)(5), 6s(k). Title VII also requires the " clearing" of certain swaps through a " derivative clearing organization" to reduce the risk that a counterparty fails to honor its swap obligations. See id. § 1a(15)(A). Finally, Title VII imposed a multitude of information reporting requirements on swap market participants. See, e.g., id. § § 2(a)(13), 7b-3(f)(9).

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Recognizing the interconnected nature of domestic and international swaps trading, Congress in the Dodd-Frank Act also provided for the extraterritorial application of the Title VII provisions in certain circumstances:

The provisions of this chapter relating to swaps that were enacted by the [Dodd-Frank Act] (including any rule prescribed or regulation promulgated under that Act), shall not apply to activities outside the United States unless those activities--(I) have a direct and significant connection with activities in, or effect on, commerce of the United States; or (2) contravene such rules or regulations as the [CFTC] may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of this chapter that was enacted by the [Dodd-Frank. Act].

7 U.S.C. § 2(i). One of the questions posed in this case is the scope of this provision's extraterritorial reach.

In furtherance of its swaps regulation framework, Congress in the Dodd-Frank Act also directed the CFTC to issue a large number of implementing regulations. See, e.g., 7 U.S.C. § 6s(d)(1) (" The [CFTC] shall adopt rules for persons that are registered as swap dealers or major swap participants under this section." ); id. § 6s(e)(2)(A) (providing that the CFTC and SEC " shall jointly adopt rules for swap dealers and major swap participants" relating to capital and margin requirements); id. § 6s(f)(2) (" The [CFTC] shall adopt rules governing reporting and recordkeeping for swap dealers and major swap participants." ); id. § 6s(i)(2) (" The [CFTC] shall adopt rules governing documentation standards for swap dealers and major swap participants." ); id. § 7a-1(k)(2) (" The [CFTC] shall adopt data collection and maintenance requirements for swaps cleared by derivatives clearing organizations." ). In addition to the typical requirements of notice-and-comment rulemaking, the Commodity Exchange Act requires the CFTC to " consider the costs and benefits of [its] action" when " promulgating a regulation" pursuant to its Title VII authority. Id. § 19(a)(1).


The CFTC has engaged in a significant series of rulemakings pursuant to its authority to regulate derivative swaps under Title VII of the Dodd-Frank Act. In this action, plaintiffs challenge fourteen of these rules (collectively, the " Title VII Rules" ). The Title VII Rules can be grouped into five categories according to their purposes and functions.

First, the clearing rules require or promote clearing of certain swaps through central organizations to reduce the credit risk posed by bilateral swaps. Srinivasan Decl. ¶ 4(a). The Clearing Determination Rule requires swaps participants to clear certain swaps through central organizations that guarantee payments to all parties involved. See 77 Fed.Reg. 74284 (Dec. 13, 2012) (codified at 17 C.F.R. Part 50). The Straight-Through Processing Rule requires, inter alia, swap dealers and clearing organizations to process swaps in ways that increase customer access to clearing, facilitate timely trading, and strengthen risk management. See 77 Fed.Reg. 21278 (April 9, 2012) (codified in scattered sections of 17 C.F.R.)

Second, the transparency and competition rules " promot[e] the use of competitive markets and regulated exchanges, rather than closed private deals, for swap transactions." Srinivasan Decl. ¶ 4(b), The Real-Time Reporting Rule establishes a framework under which regulated entities must publicly report price and volume information for swap transactions in real-time. See 77 Fed.Reg. 1182 (Jan. 9, 2012)

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(codified at 17 C.F.R. Part 43). The SEF Registration Rule requires that swap execution facilities (" SEFs" )--trading platforms on which market participants can execute certain swaps--register with the CFTC and follow certain operational principles. See 78 Fed.Reg. 33476 (June 4, 2013) (codified at 17 C.F.R. Part 37). The Trade Execution Rule establishes the procedure by which SEFs and designated contract markets (" DCMs" ) determine that certain swaps are " available to trade" and thus may only be executed on an SEF or DCM. See 78 Fed.Reg. 33606 (June 4, 2013) (codified at 17 C.F.R. § § 37.12,38.11-12).

Third, the registration and compliance rules define who must register with the CFTC and how they must do so. Srinivasan Decl. ¶ 4(c). The Entity Definition Rule, jointly promulgated by the CFTC and the SEC, supplements key statutory definitions, including " swap dealer." See 77 Fed.Reg. 30596 (May 23, 2012) (codified in scattered sections of 17 C.F.R.). Relatedly, the Swap Entity Registration Rule sets the procedures for swap dealers and major swap participants to register with the CFTC. See 77 Fed. Reg, 2613 (Jan. 19, 2012) (codified at 17 C.F.R. § § 23.21-22).

Fourth, the risk control rules " impos[e] requirements on swap dealers and other market participants to reduce risk and unlawful conduct and facilitate resolution of disputes." Srinivasan Decl. ¶ 4(d). The Daily Trading Records Rule requires swap dealers and major swap participants to maintain daily trading records of all swap activities sufficient to permit after-the-fact reconstruction of the transactions. See 77 Fed.Reg. 20128, 20133 (Apr. 3, 2012) (codified at 17 C.F.R. § 23.202), The Risk Management Rule requires swap dealers and major swap participants to take measures to monitor and manage financial risks. See id. at 20205-11 (codified at 17 C.F.R. § § 23.600-606). The Chief Compliance Officer Rule requires swap dealers and major swap participants to designate a corporate official responsible for monitoring compliance with the CEA. See id. at 20200-01 (codified at 17 C.F.R. § 3.3). The Portfolio Reconciliation and Documentation Rule requires swap dealers and major swap participants to document swap terms and valuation, confirm this documentation after swap execution, and reconcile any discrepancies. See 77 Fed.Reg. 55904 (Sept. 11, 2012) (codified at 17 C.F.R. § § 23.500-506).

Finally, the reporting rules " foster market transparency" and support the CFTC's market surveillance program. Srinivasan Decl. ¶ 4(e). The SDR Reporting Rule requires swap market participants to report transaction information to swap data repositories (" SDRs" ). See 77 Fed.Reg. 2136 (Jan. 1 3, 2012) (codified at 17 C.F.R. Part 45). The Historical SDR Reporting Rule requires similar reporting for certain past transactions. See 77 Fed.Reg. 35200 (June 12, 2012) (codified at 17 C.F.R. Part 46). The Large Trader Reporting Rule requires clearing organizations and swap dealers to report large market positions so that the CFTC can detect market manipulation. See 76 Fed.Reg. 43851 (July 22, 2011) (codified at 17 C.F.R. Part 20).

During the comment periods for most of the Title VII Rules, plaintiffs and their members sought clarification as to the Rules' extraterritorial applications under 7 U.S.C. § 2(i)-- e.g., which foreign entities were required to register as swap dealers and what types of swaps needed to be " cleared" and reported to the CFTC. See, e.g., Comment from IIB on Swap Entity Registration Rule, Jan. 10, 2011, at 3 (JA at 1 325); Comment from SIFMA on Swap Entity Registration Rule, Feb. 3, 2011, at 4 (JA at 1146); Comments from SIFMA and ISDA on Real-Time Reporting Rule,

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Feb. 7, 2011, at 27-29 (JA at 1222-24); Comments from Barclays Bank PLC et al. on Various Title VII Rules, Feb. 17, 2011 (JA at 1302); Comment from Cleary Gottlieb Steen & Hamilton LLP on SEF Registration Rule, Apr. 5, 2011, at 21-22 (JA at 1289-90). Commenters generally requested that the CFTC " narrowly construe[]" its authority to apply the Title VII Rules extraterritorially. see Comment from SIFMA on Swap Entity Registration Rule, Feb. 3, 2011, at 5 (JA at 1147), in order to " avoid regulatory uncertainty and ambiguity . . . that will ensue if [foreign] market participants are required to comply with inconsistent or redundant regulations" under U.S. and foreign law. See Comments from SIFMA and ISDA on Real-Time Reporting Rule at 27 (JA at 1222).[2]

Notwithstanding those comments, the CFTC did not address the extraterritoriality of the Title VII Rules in those rulemakings. Nor did the CFTC explicitly address the costs and benefits of the Rules' extraterritorial application in those Rules' Section 19(a)(1) cost-benefit analyses. See 7 U.S.C. § 19(a)(1). Instead, the CFTC " limit[ed]" its final rulemakings to the substantive requirements of the Title VII Rules, describing those Rules' extraterritorial applications as " beyond the scope of this rulemaking," see Swap Entity Registration Rule, 77 Fed.Reg. it 2619-20, and stilting that it " intend[ed] to separately address" issues of extraterritorial application in " separate releases." See Entity Definition Rule, 77 Fed, Reg. at 30605, 30688 n. 1119. That separate " release" came in the form of the Cross-Border Action also challenged by plaintiffs in this case.


On July 12, 2012, the CFTC released for public comment a proposed " interpretive guidance and policy statement" addressing the " cross-border application" of the Title VII Rules. See Cross-Border Application of Certain Swaps of the Commodity Exchange Act, 77 Fed.Reg. 41214 (July 32, 2012). On January 7, 2013, after receiving approximately 290 comments on the initial proposed " guidance," see Cross-Border Action, 78 Fed.Reg. at 45295, the CFTC issued further proposed " guidance" on specific elements of its proposed cross-border application policies. See Further Proposed Guidance Regarding Compliance with Certain Swap Regulations, 78 Fed.Reg. 909 (Jan. 7, 2013). The CFTC received approximately two dozen additional comments on the further proposed " guidance." Cross-Border Action, 78 Fed, Reg. at 45295.

On July 22, 2033, the CFTC issued an " Exemptive Order" that provided certain entities temporary " transitional relief" from the Title VII Rules " in order to avoid unnecessary market disruptions and to facilitate market participants' transition to the new Dodd-Frank swaps regime," including policies in the forthcoming Cross-Border Action. See Exemptive Order Regarding Compliance with Certain Swap Regulations, 78 Fed.Reg. 43785, 43786 (July 22, 2013). On July 26, 2013. over a dissent from Commissioner Scott D. O'Malia, the CFTC promulgated its final Cross-Border Action. 78 Fed. Reg, at 45292. The final document, including appendices, encompasses seventy-eight pages in the Federal Register and does not contain a cost-benefit analysis. The Court addresses only those portions of the Cross-Border

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Action relevant to plaintiffs' amended complaint.

A. " Scope" of the Cross-Border Action

Formally titled " Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations," the Cross-Border Action contains a section devoted to its " scope," See 78 Fed. Reg, at 45293, 45297, According to that section, the Cross-Border Action

sets forth the general policy of the [CFTC] in interpreting how section 2(i) of the CEA provides for the application of the swaps provisions of the CEA and [CFTC] regulations to cross-border activities when such activities have a " direct and significant connection with activities in, or effect on, commerce of the United States" or when they contravene [CFTC] rulemaking.

Id. at 45297. Because of the " complex and dynamic nature of the global swap market and the need to take an adaptable approach to cross-border issues," the Cross-Border Action states that the CFTC will " periodically review" the Cross-Border Action as " foreign regulatory regimes and the global swaps market continue to evolve," Id.

The Cross-Border Action distinguishes itself from a " binding rule" that " would state with precision when particular requirements do and do not apply to particular situations." 78 Fed.Reg. at 45297. Instead, the Cross-Border Action is " a statement of the [CFTC]'s general policy regarding cross-border swap activities and allows for flexibility in application to various situations, including consideration of all relevant facts and circumstances that are not explicitly discussed" within the Cross-Border Action itself. Id. (footnote omitted). The Cross-Border Action further emphasizes that while it " is intended to inform the public of the [CFTC's] views on how it ordinarily expects to apply existing law and regulations in the cross-border context," the CFTC will apply the relevant statutory provisions and regulations on a case-by-case basis according to " the particular facts and circumstances" of the cross-border conduct. Id.

The Cross-Border Action's positions on its " scope" are carried out through its more substantive portions. In those sections, the Cross-Border Action conditions its statements with the modifier " generally" nearly 200 times, see Brief of the Chamber of Commerce of the United States of America as Amicus Curiae in Support of Plaintiffs' Motion for Summary judgment, Feb. 3, 2014 [Dkt. No. 25] at 2; reiterates the CFTC's case-by-case approach on multiple occasions, e.g., Cross-Border Action, 78 Fed.Reg. at 45308-09, 45316, 45320, 45348; and encourages market participants to consult CFTC staff regarding individual circumstances. See, e.g., id. at 45326, 45345, 45349.

B. "Interpretation" of 7 U.S.C. § 2(i)

The Cross-Border Action's interpretation of 7 U.S.C. § 2(i) immediately follows the section defining the Action's " scope." See 78 Fed.Reg. at 45297-300. The interpretation focuses on Section 2(i)'s statutory language providing that the Title VII statutory provisions and regulations " shall not apply to activities outside the United States unless those activities . . . have a direct and significant connection with activities in, or effect on, commerce of the United States." 7 U.S.C. § 2(i); see Cross-Border Action, 78 Fed.Reg. at 45298. Relying on the Supreme Court's interpretation of similar language in F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 124 S.Ct. 2359, 159 L.Ed.2d 226 (2004), the Cross-Border Action reads Section 2(i) as a " clear expression of congressional intent that the swaps provisions of Title VII of the Dodd-Frank Act apply to activities beyond the borders

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of the United States when certain circumstances are present." Cross-Border Action, 78 Fed.Reg. at 45298.

The Cross-Border Action goes on to construe the word " direct" in Section 2(i)(1) to require only " a reasonably proximate causal nexus," and not " foreseeability, substantiality, or immediacy." 78 Fed. Reg, at 45300, In making this determination, the Cross-Border Action adopts the position of the Department of Justice Antitrust Division with respect to the meaning of the same term in the Foreign Trade Antitrust Improvements Act, 15 U.S.C. § 6a, which had been recently adopted by the Seventh Circuit, sitting en banc, in Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012), Cross-Border Action, 78 Fed.Reg. at 45299-300.

The Cross-Border Action also rejects any interpretation of Section 2(i)(1) that would " require a transaction-by-transaction basis determination that a specific swap outside the United States" has the jurisdictionally requisite '" connection with activities in, or effect on, commerce in the United States,'" Cross-Border Action, 78 Fed, Reg, at 45300 (quoting 7 U.S.C. § 2(i)(1)). Instead, the Cross-Border Action concludes that " it is the connection of swap activities, viewed as a class or in the aggregate, to activities in commerce of the United States that must be assessed to determine whether [extraterritorial] application of the [Title VII] swaps provisions is warranted." Id.

C. Interpretation of the Term " U.S. person"

Having interpreted the scope of Section 2(i)(1)'s jurisdictional nexus, the Cross-Border Action uses the term " U.S. person" to " generally encompass[] those persons whose activities--either individually or in the aggregate--have the requisite 'direct and significant' connection with activities in, or effect on, U.S. commerce" to satisfy Section 2(i)'s jurisdictional nexus and therefore to be subject to the Title VII provisions and regulations. Cross Border Action, 78 Fed.Reg. at 45308; see also id. at 45301 (" [T]he term 'U.S. person' identifies those persons who, under the [CFTC]'s interpretation, could be expected to satisfy the jurisdictional nexus under section 2(i) of the CEA based on their swap activities either individually or in the aggregate." ). The Cross-Border Action thereafter provides an eight-pronged " interpretation" of the term " U.S. person." Id. at 45316-17. The interpretation expands beyond " [a]ny natural person who is a resident of the United States" and " any corporation . . . that is organized or incorporated under the laws of a state or other jurisdiction in the United States or having its principal place of business in the United States" to include, inter alia, other entities based on their legal and financial relationships with the aforementioned types of U.S. persons. Id. The Cross-Border Action explains that

the various prongs of the [CFTC]'s interpretation are intended to identify persons for which, in practice, the connection or effects required by section 2(i) are likely to exist and thereby inform the public of circumstances in which the [CFTC] expects that the swaps provisions of the CEA and the [CFTC]'s regulations would apply pursuant to the statute. In this respect, the [CFTC] will consider not only a person's legal form and its domicile (or location of operation), but also the economic reality of a particular structure or arrangement, along with all other relevant facts and circumstances, in order to identify those persons whose activities meet the " direct and significant" jurisdictional nexus.

Id. at 45308-09. For the purposes of this lawsuit, the most relevant of the Cross-Border

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Action's interpretations of the term " U.S. person" are those relating to (1) foreign branches of U.S. persons, and (2) foreign guaranteed affiliates of U.S. persons.

In both its proposed and final forms, the Cross-Border Action interprets the term " U.S. person" to include " a foreign branch of a U.S. person." Cross-Border Action, 78 Fed.Reg. at 45315; id. at 45317. The Cross-Border Action explains that " a branch does not have a legal identity separate from that of its principal entity" and thus " branches are neither separately incorporated nor separately capitalized and, more generally, the rights and obligations of a branch are the rights and obligations of its principal entity (and vice versa)." Id. at 45315. Therefore, the Cross-Border Action expresses the CFTC's general view that " the activities of a foreign branch as the activities of the principal entity, and thus a foreign branch of a U.S. person is a U.S. person." Id.; see also id. at 45317 (" [T]he term 'U.S. person' generally means that a foreign branch of a U.S. person would be covered by virtue of the fact that it is a part, or an extension, of a U.S. person." ).

In contrast to foreign branches of U.S. persons, the Cross-Border Action emphasizes that the CFTC " does not interpret section 2(i) to require that it treat a non-U.S. person as a 'U.S. person' solely because it is controlled by or under common control with a U.S. person." Cross-Border Action, 78 Fed.Reg. at 45312 n.215. Instead, the Cross-Border Action expresses CFTC's view that " where one or more U.S. owners has unlimited responsibility for losses or nonperformance by its majority-owned affiliate" --a so-called " guaranteed affiliate" --" there is generally a direct and significant connection with activities in, or effect on, commerce of the United States within the meaning of section 2(i)," id. at 45312, because the " guarantee creates a significant risk transfer into the United States." Id. at 45313.[3] Therefore, the Cross-Border Action concludes that a guaranteed affiliate of a U.S. person would itself " appropriately be considered a 'U.S. person" ' subject to applicable Title VII rules and regulations. Id. at 45312.

D. Aggregation

The Cross-Border Action also addresses the aggregation requirement for the de minimis exception to Dodd-Frank's " swap dealer" designation. See 78 Fed.Reg. at 45320-27. The Dodd-Frank Act exempted from its definition of " swap dealer" those swap dealers who " engage[] in a de minimis quantity of security-based swap dealing in connection with transactions with or on behalf of [their] customers." 7 U.S.C. § 1a(49)(D). The Act also required the CFTC to " promulgate regulations to establish factors with respect to the making of any determination to exempt." Id.

On May 23, 2012, the CFTC and the SEC promulgated such regulations in their joint Entity Definition Rule. See 77 Fed.Reg. at 30626-35 (codified at 17 C.F.R. § 1.3(ggg)(4)). The regulations, inter alia, exempt a person otherwise meeting the " swap dealer" definition from registration requirements

so long as the swap positions connected with those dealing activities into which the person--or any other entity controlling, controlled by or under common control with the person--enters over the

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course of the immediately preceding 12 months . . . have an aggregate gross notional amount of no more than $3 billion . . . .

17 C.F.R. § 1.3(ggg)(4)(i) (emphasis added).

The Cross-Border Action construes " any other entity controlling, controlled by or under common control with," see 17 C.F.R. § 1.3(ggg)(4), to generally include foreign affiliates. See Cross Border Action, 78 Fed.Reg. at 45326. As a result, when aggregating swaps positions to determine whether to register as a swap dealer, " a person (whether U.S. or non-U.S.) should generally include all relevant dealing swaps of all its U.S. and non-U.S. affiliates under common control, except that swaps of an affiliate (either U.S. or non-U.S.) that is a registered swap dealer are excluded." Id. The Cross-Border Action explains:

Stated in general terms, the [CFTC]'s interpretation allows both U.S. persons and non-U.S. persons in an affiliated group to engage in swap dealing activity up to the de minimis threshold. When the affiliated group meets the de minimis threshold in the aggregate, one or more affiliate(s) (inside or outside the United States) would generally have to register as swap dealer(s) so that the relevant swap dealing activity of the unregistered affiliates remains below the threshold.

Id. at 45323.

E. Categorization of Certain Tille VII Rules as " Entity-" or " Transaction-level"

The Cross-Border Action also categorizes certain Title VII Rules as either " entity-" or " transaction-level," to distinguish when those Rules apply extraterritorially. " Entity-level" requirements define the general obligations of regulated market participants irrespective of the characteristics of individual swaps transactions. Thus, under the Cross-Border Action, entity-level requirements generally apply to " registered swap dealers ... across all their swaps without distinction as to counterparty or the location of the swap." 78 Fed.Reg. at 45331 (emphasis added). The entity-level requirements include Risk Management, Chief Compliance Officer, SDR Reporting, Historical SDR Reporting, and Large Trader Reporting Rules. See id. at 45364-66.

In contrast, the " transaction-level" requirements impose transaction-specific obligations on swap market participants. Under the Cross-Border Action, the identity of the counterparty is significant in determining whether a foreign registered swap dealer must comply with transaction-level requirements for that swap : if the counterparty is not a U.S.-person, the transaction-level requirements generally would not apply. 78 Fed.Reg. at 45333. The " transaction-level" requirements include the Real-Time Reporting, Daily Trading Records, Clearing Determination, Straight-Through Processing, Portfolio Reconciliation and Documentation, and Trade Execution Rules. See id. at 45366-68.

F. Application of Transaction-level Requirements to Certain " Foreign Affiliate Conduits"

The Cross-Border Action extends transaction-level requirements to certain so-called " foreign affiliate conduits." See 78 Fed.Reg. at 45357-59. As ...

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