4/3/17 - Dodd-Frank Title VII: The Challenges Faced by Non-U.S. Swap Dealers
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4/3/17 - Dodd-Frank Title VII: The Challenges Faced by Non-U.S. Swap Dealers

Since the Dodd-Frank Act’s enactment, the Commodity Futures Trading Commission has issued a host of regulations and guidance under Title VII. The cross-border application of the regulatory regime and the availability of substituted compliance (when non-U.S. swap dealers can comply with their home jurisdiction’s regulations) are of particular importance to the more than 50 non-U.S. swap dealers that have been provisionally registered.1 These regulations have introduced significant compliance challenges for these non-U.S. swap dealers. They must establish and implement a Title VII compliance program; comply with applicable CFTC regulations, such as initial and variation margin requirements; prepare for examination by the National Futures Association; and comply with local regulations where substituted compliance is available.

Given the new U.S. administration and the leadership changes at regulators, there is uncertainty regarding the overall direction of U.S. financial regulations; however, the swap dealer regulatory regime is now well-established and unlikely to change significantly given the substantial compliance costs the provisionally registered swap dealers have already incurred. In fact, new rules continue to be proposed and implemented, and regulators are ramping up their supervisory and enforcement activity. If the CFTC’s proposed cross-border rule is finalized in its current form, it will likely require a significant number of additional firms to apply for registration as swap dealers2 and will further complicate the compliance efforts of non-U.S. swap dealers.

The chart below summarizes the key challenges currently facing non-U.S. swap dealers.

Top Challenges for Non-U.S. Swap Dealers

1 Effectively Implementing Margin Requirements
Non-U.S. swap dealers need to ensure compliance with U.S. and local margin rules. Many Phase I swap dealers3 either are refining, or will need to refine, their implementation, while Phase II firms are implementing initial margin requirements, presumably with consideration of lessons learned by Phase I firms.
2 Preparing For Upcoming NFA Exams
The NFA has completed its initial examinations of U.S. swap dealers and is now starting to examine non-U.S. swap dealers. Firms are preparing for these examinations by conducting detailed testing of their swap dealer compliance framework.
3 Addressing Industry-Wide Compliance Issues
While regulators are mindful of industry-wide issues, including in relation to trade reporting and recordkeeping of pre-trade communications, they nonetheless expect swap dealers to make substantial efforts to comply with these requirements. Those that have fallen significantly short of expectations have suffered enforcement actions and substantial fines.
4 Addressing NFA Feedback
The registration process with the NFA typically leads to feedback on the design effectiveness of the policies and procedures required to be submitted during registration. NFA comments are substantive, and many provisionally registered swap dealers continue to address and remediate their compliance programs.
5 Making Effective Use of Substituted Compliance
Substituted compliance permits swap dealers to comply with certain home country regulations in lieu of CFTC requirements. Given the complexity of the CFTC’s equivalency determinations, many swap dealers are still determining how to use substituted compliance effectively.
6 Balancing the Controls For Compliance With U.S. and Local Regulations
Non-U.S. swap dealers are subject to both U.S. and home country regulatory requirements. Many of them are considering whether they have the right balance between the controls established for complying with U.S. regulations and with local regulations.
7 Proper Embedding of the Swap Dealer Compliance Framework
Many swap dealers implemented compliance frameworks that, when tested, were found to be less than effective, and instances of non-compliance were identified. These swap dealers must continue their efforts to establish and embed an effective Title VII compliance program.
8 Integrating Swap Dealer Controls Into the Broader Control Framework
As swap dealer controls become routine, firms are looking to better integrate them into their broader control frameworks.
9 Developing a Robust Chief Compliance Officer Function
Swap dealer CCOs are expected to implement robust and demonstrable processes to discharge their specific responsibilities to the U.S. regulators. This is proving to be challenging for those non-U.S. swap dealers where governance processes do not enable the CCO to have sufficient oversight and authority over businesses extending across geographies and legal entities.

How Promontory Can Help

Promontory helps non-U.S. swap dealers navigate regulatory challenges at every stage. Our team, including a former industry CCO and a former regulator, has significant experience with CFTC matters, specifically including:


Strategic Assessments

We support firms’ strategic decisionmaking to set the foundation for swap dealer registration.

  • Performing strategic assessments against CFTC Title VII regulations and other related regulatory requirements, such as Securities and Exchange Commission regulations for security-based swap dealers, the Volcker Rule, and U.S. regulations applicable to foreign banking organizations

Framework Set-Up and Embedding

We help firms establish and embed their swap dealer compliance frameworks ahead of registration.

  • Drafting swap dealer compliance manuals, policies, and procedures
  • Defining and designing swap dealer governance and compliance frameworks
  • Embedding swap dealer compliance frameworks within the wider compliance operating models


We prepare firms for the CFTC registration process.

  • Conducting readiness assessments against CFTC and NFA requirements and expectations
  • Providing support with the registration process

Framework Enhancement and Maintenance

We assist swap dealers with the maintenance of their swap dealer compliance frameworks.

  • Remediating swap dealer policies and procedures in response to CFTC and NFA feedback
  • Reviewing swap dealer governance and compliance frameworks against regulatory requirements and expectations
  • Designing and executing tests of operational effectiveness of key swap dealer controls
  • Advising on swap dealer CCO annual reports, the attestation process, and quarterly risk exposure reports

Margin Services

We support swap dealers' implementation of margin requirements.

  • Assisting with margin-model implementation and validation (including the International Swaps and Derivatives Association’s framework, the Standard Initial Margin Model, or SIMM)
  • Supporting the development and implementation of margin programs that comply with U.S. and local margin regimes
  • Drafting margin policies and procedures

“Health Checks”

We help swap dealers identify and investigate internal issues.

  • Conducting mock examinations ahead of regulatory visits and providing feedback and recommendations
  • Conducting internal investigations

We provide further services to support firms’ enhancement of their swap dealer compliance framework.

  • Training first- and second-line staff on swap dealer requirements
  • Advising internal audit functions on the appropriate scope, execution, and accompanying analysis of swap dealer audit programs
  • Advising on management of regulatory relations
  • Augmenting clients’ resources

Contact Promontory

Doug Harris
Managing Director
+1 212 365 6568

Henry Raine
Managing Director
+44 207 997 3467

DJ Hennes
Senior Principal
+1 212 365 6989


1. Provisionally registered swap dealers will become fully registered once the CFTC’s capital rule has been finalized. The status of all provisionally registered swap dealers will automatically change to “registered” at that time.

2. The CFTC estimates that 14 unregistered non-U.S. firms may be required to register as new swap dealers if the proposed cross-border rule is finalized in its current form.

3. Phase I swap dealers were required to comply with initial margin and variation margin rules from Sept. 1, 2016, as part of the phased-in implementation of these rules. Phase II swap dealers must comply with these rules from Sept. 1, 2017.