October 15, 2012 CFTC Relief and Guidance as the “Swap” Definition Takes Effect

CFTC Issues Interpretive and No-Action Letters, and Responds to Questions Providing Guidance as the Definition of “Swap” Takes Effect

SUMMARY The Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”, collectively with the SEC, “Commissions”)1 adopted rules further defining key terms under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) including “swap dealer”, “major swap participant”, “security-based swap dealer”, “major security-based swap participant” and “eligible contract participant” (the “Entity Definitions”), and subsequently adopted rules further defining additional key terms under Title VII of Dodd-Frank (“Title VII”) including “swap”, “security-based swap” and “mixed swap” (the “Product Definitions”).2 The Product Definitions generally took effect on October 12, 2012, triggering a number of regulatory obligations under Title VII, except that for purposes of certain relief from SEC requirements, the effective date of the definition of “security-based swap” will be February 11, 2013.3 On October 10-12, the CFTC issued an unprecedented 13 interpretive and no-action letters as well as three sets of responses to questions previously submitted by industry participants. The letters and other guidance provide clarifications and relief in a number of areas, including:

 Clarification as to the timing of certain restrictions relating to swap customer collateral.  Temporary no-action relief applicable to transactions that may be exempt under pending proposals to exempt certain transactions in electricity markets and certain transactions involving not-for-profit electric cooperatives.

 Interpretive relief for certain real estate investment trusts (“REITs”) and securitization vehicles from meeting the definition of “commodity pool” under Section 1a(10) of the Commodity Exchange Act (“CEA”).

New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

www.sullcrom.com

 Temporary no-action relief from registration requirements for persons required to register as a introducing broker (“IB”), CPO, CTA, floor broker (“FB”), floor trader (“FT”), or an associated person of an FCM, IB, CPO or CTA, solely by virtue of involvement with swaps and/or certain CME/ICE Contracts.  Temporary no-action relief relating to certain swap transactions in exempt and agricultural commodities, including with respect to transactions cleared through CME Group (“CME”) and Intercontinental Exchange (“ICE”) that are being transitioned to a futures model.  Interpretive guidance and no-action relief relating to the restriction against a person that is not an eligible contract participant (“ECP”) from entering into a swap unless the swap is entered into on, or subject to the rules of, a designated contract market (“DCM”).  Temporary no-action relief that effectively raises the de minimis threshold under the definition of “swap dealer” from $25 million to $800 million with respect to certain swap dealing transactions conducted with special entities that are utilities.  Interpretive relief for calculating whether a registered investment company meets certain thresholds for being exempt from CPO registration requirements under Section 4.5 of the CEA.  Temporary no-action relief from swap dealer (“SD”), major swap participant (“MSP”), commodity pool operator (“CPO”), and commodity trading advisor (“CTA”) registration requirements on account of foreign exchange forward and foreign exchange swap transactions.  Temporary no-action relief for transactions between non-U.S. counterparties for purposes of SD/MSP calculations.  Responses to questions relating to the definitions of “swap dealer” and “major swap participant”.  Responses to questions relating to the timing of reporting obligations and the reporting of cleared swaps. A more detailed, but still summary, analysis of these issuances is provided below.4

RELIEF REGARDING TIMING OF SWAP COLLATERAL SEGREGATION On October 10, 2012, the CFTC issued temporary no-action relief (“Letter 12-10”) until November 8, 2012 with respect to the statutory requirement for the segregation of cleared swaps collateral held at a derivatives clearing organization. Dodd-Frank amended the CEA to require the segregation of customer collateral held by a derivatives clearing organization (“DCO”) and a futures commission merchant (“FCM”) on behalf of customers (such collateral, “Customer Swaps Collateral”) from collateral posted with respect to proprietary accounts of the FCM. In addition, an FCM and a DCO that receives Customer Swaps Collateral with respect to cleared swap positions must treat such Customer Swaps Collateral as belonging to the relevant customer and cannot use that Customer Swaps Collateral to margin or secure its own swap positions or any other customer’s cleared swap positions. In February of 2012, the CFTC adopted rules implementing these statutory requirements and imposing a legally segregated, operationally commingled model (“LSOC”).5 The compliance date for the LSOC rules is November 8, 2012. Letter 12-10 clarifies that the statutory requirements as to segregation of Customer Swaps Collateral do not apply until November 8, 2012.6 It should be noted that the CFTC did not provide no- action relief from the requirement that cleared swaps be treated as “commodity contracts” under the U.S. bankruptcy code.7

-2- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

RELIEF FOR RTO/ISO TRANSACTIONS On October 11, 2012, the CFTC issued no-action relief (“Letter 12-11”)8 relating to its August 28, 2012 proposed order to exempt certain transactions involving independent system operators and regional transmission organizations (the “Proposed ISO-RTO Order”)9 from the provision of the CEA and the CFTC Regulations thereunder other than provisions relating to the CFTC’s general anti-fraud, anti- manipulation and enforcement authority. The Proposed ISO-RTO Order would exempt “Financial Transmission Rights”, “Energy Transactions”, “Forward Capacity Transactions”, and “Reserve or Regulations Transactions” (as defined in the Proposed ISO-RTO Order) with certain independent system operators or regional transmission organizations. Letter 12-11 provides no-action relief whereby it will exempt these transactions on the terms set forth in the Proposed ISO-RTO Order. This relief will expire on the earlier of March 31, 2013 or the effective date of any CFTC final action with respect to the Proposed ISO-RTO Order.

RELIEF FOR COOP TRANSACTIONS On October 11, 2012, the CFTC issued no-action relief (“Letter 12-12”)10 relating to its August 23, 2012 proposed order to exempt certain transactions involving not-for-profit electric utilities (the “Proposed Coop Order”)11 from provisions of the CEA and CFTC Regulations thereunder other than provisions relating to the CFTC’s general anti-fraud, anti-manipulation and enforcement authority. The Proposed Coop Order was in response to an industry petition (the “Coop Petition”), and would exempt an “Electric Operations- Related Transaction” (as defined in the Coop Petition) solely between “NFP Electric Entities” (as defined in the Coop Petition) from the provision of the CEA (excepting the CFTC’s general anti-fraud, anti- manipulation and enforcement provisions). Letter 12-12 grants no-action relief whereby it will exempt Electric Operations Related Transactions between NFP Electric Entities on the terms set forth in the Coop Petition. This relief will expire on the earlier of March 31, 2013 or the effective date of any final CFTC action taken with respect to the Proposed Coop Order.

RELIEF FOR REAL ESTATE INVESTMENT TRUSTS FROM COMMODITY POOL STATUS On October 11, 2012, the CFTC issued Interpretive Letter 12-13 (“Letter 12-13”) defining the term “commodity pool” to exclude certain real estate investment trusts (“REITs”).12 In response to a request for interpretive guidance stating that equity REITs are operating companies that hold income-producing real estate and engage in real estate management activities and are not within the statutory definition of a “commodity pool,” Letter 12-13 provides that a REIT meeting the following criteria would not meet the definition of “commodity pool” as that term is used under Section 1a(10) of the CEA and Section 4.10(d) of the CFTC’s Regulations:

-3- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

 The REIT primarily derives its income from the ownership and management of real estate and uses derivatives for the limited purpose of “migitat[ing] their exposure to changes in interest rates or fluctuations in currency”;  The REIT is operated so as to comply with all of the requirements of a REIT election under the Internal Revenue Code, including 26 U.S.C. § 856(c)(2) and 26 U.S.C. § 856(c)(3);13 and  The REIT has identified itself as an equity REIT in Item G of its last U.S. income tax return on Form 1120-REIT and continues to qualify as such, or, if the REIT has not yet filed its first tax filing with the Internal Revenue Service, the REIT has stated its intention to do so to its participants and effectuates its stated intention.

Taken together, the Letter 12-14 (as defined below) and Letter 12-13 provide further guidance regarding the distinction the CFTC has made between operating companies, which may engage in commodity interest transactions, but are not considered to be “commodity pools,” and true commodity pools subject to CFTC regulations. Relief under Letter 12-13 is self-effectuating, and qualifying REITs do not need to take additional action to benefit from the relief provided.

RELIEF FOR CERTAIN SECURITIZATION VEHICLES FROM COMMODITY POOL STATUS On October 11, 2012, the CFTC issued Interpretive Letter 12-14 (“Letter 12-14”) defining the term “commodity pool” to exclude certain securitization vehicles.14 Letter 12-14 responds to a request for relief for (1) entities that are operated consistent with SEC Regulation AB, SEC rule 3a-7, or the requirements of a covered bond statute, (2) entities involved in collateralized debt obligations, collateralized loan obligations, and synthetic securitizations, and (3) securitization transactions that were initiated before the date of Letter 12-14 or are otherwise in the process of being executed.

Though Letter 12-14 declines to issue the broad scope of requested relief, the CFTC noted the evolution of the definition of the term “pool” when discussing the decision to provide relief to certain securitization vehicles. The CFTC mentioned that while it has declined to interpret the phrase “operated for the purpose of trading [commodity interests],” contained in the definition of a “pool,” narrowly, there still may be entities whose primary business focus lies outside operating commodity pools and that the CFTC would evaluate the facts relevant to an entity’s operation when making a determination of commodity pool status. Significantly, Letter 12-14 indicates that securitization vehicles that do not have multiple equity participants, do not make allocations of accrued profits or losses, and only issue interests in the form of debt or debt-like interests with a stated interest rate or yield, principal balance and a specific maturity date do not likely come within the definition of a “commodity pool.”15

Letter 12-14 provides relief for certain securitization vehicles issuing asset-backed securities (including mortgage-backed securities) as not coming within the definition of a “commodity pool” where:

 The issuer of the asset-backed securities is operated consistent with the conditions set forth in SEC Regulation AB or Rule 3a-7, whether or not the issuer’s security offerings are in fact

-4- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

regulated pursuant to either regulation, such that the issuer, pool assets, and issued securities satisfy the requirements of either regulation;  The entity’s activities are limited to passively owning or holding a pool of receivables or other financial assets,16 which may be either fixed or revolving, that by their terms convert to cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to security holders;  The entity’s use of derivatives is limited to the uses of derivatives permitted under the terms of SEC Regulation AB, which include credit enhancement and the use of derivatives such as interest rate and currency swap agreements to alter the payment characteristics of the cash flows from the issuing entity;  The issuer makes payments to securities holders only from cash flow generated by its pool assets and other permitted rights and assets, and not from or otherwise based upon changes in the value of the entity’s assets; and  The issuer is not permitted to acquire additional assets or dispose of assets for the primary purpose of realizing gain or minimizing loss due to changes in the market value of the vehicle’s assets.

Qualifying securitization vehicles will not be considered commodity pools, and the operators of such securitization vehicles thus will not be required to register with the CFTC as CPOs. As for securitization vehicles that cannot satisfy all the criteria stated above, Letter 12-14 notes that the CFTC is open to discussions with securitization sponsors to consider the facts and circumstances of their securitization structures with a view to determining whether or not they might not be properly considered a commodity pool (and if the structure may be considered a commodity pool, whether other relief might be appropriate under the circumstances, such as whether the structure may be treated as an exempt pool). Securitization vehicles that do not qualify for relief under the conditions set forth in Letter 12-14 may be entitled to temporary registration relief under Letter 12-15.

REGISTRATION RELIEF RELATED TO SWAPS AND ICE/CME CONTRACTS On October 11, 2012, the CFTC issued No-Action Letter 12-15 (“Letter 12-15”)17 providing temporary no- action relief for a person who would be required to register (a “Relieved Registrant”) as an Introducing Broker (“IB”), CPO, CTA, Floor Broker (“FB”), or Floor Trader (“FT”) solely because of its swaps activity or the transition of certain contracts by the Intercontinental Exchange (“ICE”) or the New York Mercantile Exchange (“NYMEX”).18 Temporary relief is also provided for a person otherwise required to register as an associated person (a “Relieved AP”) of an FCM, IB, CPO, or CTA solely by virtue of his or her involvement with swaps or with the transition of the applicable ICE or NYMEX Contracts. Letter 12-15 also provides a process by which swap dealers and major swap participants could qualify for no-action relief from the prohibition against associating with an associated person (“AP”) subject to disqualification under Section 8a(2) or 8a(3) of the CEA (“Statutory Disqualification”).

Under the temporary relief, the CFTC will not commence an enforcement action against Relieved Registrants or Relieved APs as long as they have filed an application for registration with the National Futures Association (the “NFA”) on or before December 31, 2012. Importantly, Letter 12-15 makes clear -5- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

that a Relieved Registrant’s or Relieved AP’s registration does not need to be effective by December 31, 2012, but rather that such person must have filed its required application and other documents by December 31, 2012, as discussed below.19 Absent the temporary relief provided by Letter 12-15, many Relieved Registrants and Relieved APs could have been required have their registration with the CFTC effective by October 12, 2012 in order to continue their swaps activity.

To qualify for no-action relief under Letter 12-15, the Relieved Registrant or Relieved AP must meet the following conditions:

 On or before December 31, 2012, the person completes and files with NFA a registration application, including as appropriate, Forms 7-R and 8-R, as well as a fingerprint card for each of its principals and APs.

 With respect to a Relieved Registrant that would be required to register as an IB, such Relieved Registrant files with NFA a Form 1-FR-IB or guarantee agreement, in accordance with the requirements of Section 1.10(a)(2)(ii) of the CFTC’s Regulations on or before March 31, 2013.

 With respect to a Relieved Registrant that would be required to register as an FB or FT, such Relieved Registrant files with the NFA documentation of its trading privileges on a designated contract market or swap execution facility, in accordance with the requirements of Section 3.11 of the CFTC’s Regulations on or before March 31, 2013.

 On and after December 31, 2012, the person is subject to and makes a good faith effort to comply with the CEA and the Commission’s regulations applicable to its activities as an IB, CPO, CTA, AP of any of the foregoing, AP of an FCM, FB or FT as if the person was in fact registered in such capacity.

The no-action relief for Relieved Registrants and Relieved APs terminates upon the earlier of the Relieved Registrant or Relieved AP, as applicable, (1) receiving notice of its registration from NFA or (2) five days after receiving notice that it may be disqualified from registration under Section 8a(2) or 8a(3) of the CEA.

As referenced above, Letter 12-15 also provides no-action relief for SD/MSPs relating to the prohibition against associating with APs that are subject to Statutory Disqualification. Specifically, under the Letter 12-15, an SD/MSP may permit a person associated with it who is subject to Statutory Disqualification to effect or be involved in effective swaps on its behalf, if the following process is followed:

 The SD/MSP notifies NFA that the SD/MSP has determined that a person associated with it is subject to Statutory Disqualification, and submits to NFA information that identifies the person and the matter underlying the Statutory Disqualification.

 Based solely on the information that the SD/MSP submits, NFA will notify the SD/MSP whether or not NFA would have granted the person registration as an AP.

 Where the person associated with the SD/MSP is effecting or involved in effecting swaps on behalf of the SD/MSP at the time the SD/MSP files a Form 7-R with NFA, the SD/MSP must provide the notification and information to NFA no later than 90 days following the date it files the Form 7-R. The SD/MSP may permit the person to effect or be involved in effecting swaps on behalf of the SD/MSP -6- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

until such time as NFA notifies the SD/MSP whether or not NFA would have registered the person as an AP. Following a notification by NFA that it would not have registered the person as an AP, the SD/MSP may no longer permit the person to effect or be involved in effecting swaps on its behalf.

 Where the person does not effect or is not involved in effecting swaps on behalf of the SD/MSP at the time the SD/MSP files the Form 7-R, the SD/MSP may not permit the person to effect or be involved in effecting swaps on behalf of the SD/MSP prior to receiving notice from NFA that NFA would have granted the person registration as an AP.

RELIEF FOR CERTAIN AGRICULTURAL AND EXEMPT SWAPS On October 12, 2012, the CFTC issued two no-action letters, No-Action Letter 12-16 (“Letter 12-16”) and No-Action Letter 12-20 (“Letter 12-20”) providing limited temporary relief with respect to certain swaps, which importantly differ across the two letters, on agricultural and exempt (e.g., energy and metals) commodities.20

Letter 12-16 provides no-action relief to any person that excludes from its calculation of aggregate gross notional amount of swaps connected with its swap dealing activity for purposes of evaluating if it qualifies for the de minimis exclusion from the swap dealer definition under Section 1.3(ggg)(4) (“De Minimis Calculations”), a swap that (i) references an exempt commodity or agricultural commodity, (ii) is executed prior to December 31, 2012, and (iii) is either cleared on a DCO registered with the CFTC, or entered into contingent upon its being subsequently exchanged for and cleared as a futures position as part of an exchange for related position transaction conducted in accordance with a designated contract market’s rules. This relief is expected to assist the transitions by CME and ICE of their respective over-the-counter (“OTC”) markets for cleared swaps to a futures model.

Letter 12-20 provides broader but more temporary no-action relief. In particular, no-action relief under Letter 12-20 permits a person to exclude a swap referencing an exempt or agricultural commodity from (1) its De Minimis Calculations, if the swap is executed prior to October 20, 2012, and (2) calculation of its daily average aggregate uncollateralized outward exposure and daily average aggregate potential outward exposure (“MSP Exposure”) for purposes of Commission Regulation 1.3(jjj)(4) from Oct. 12, 2012 through Oct. 20, 2012.

RELIEF FROM RESTRICTIONS ON TRANSACTIONS WITH NON-ELIGIBLE CONTRACT PARTICIPANTS On October 12, 2012, the CFTC issued interpretive guidance and no-action relief (“Letter 12-17”) relating to restrictions under Section 2(e) of the CEA.21 Section 2(e) prohibits any person other than an ECP from entering into a swap except on, or subject to the rules of, a DCM. In the Product Definitions, the CFTC interprets the term “swap” to include a guarantee of a swap to the extent that a counterparty to a swap position would have recourse to the guarantor in connection with the position.22 Letter 12-17 interprets Section 2(e) to require23 that a guarantor of a swap be an ECP unless either (i) the guaranteed swap is

-7- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

entered into on, or subject to the rules of, a DCM, (ii) the CFTC provides relief under Section 4(c) of the CEA, or (iii) the guaranteed swap qualifies as a trade option under Part 32 of the CFTC’s regulations and complies with the requirements applicable to trade options thereunder.

Letter 12-17 provides temporary no-action relief lasting until March 31, 2013 with respect to a swap guarantee made by a non-ECP applicable to (1) the non-ECP guarantor, and (2) the beneficiary of a swap guaranteed by the non-ECP, provided that the beneficiary’s swap counterparty is an ECP or satisfies the terms of one of the no-action positions set forth in Letter 12-17. Furthermore, Letter 12-17 provides temporary no-action relief lasting until December 31, 2012 with respect to a swap with a counterparty that is not an ECP, provided such counterparty was an “eligible contract participant” as defined in CEA prior to enactment of Dodd-Frank, or prior to October 12, 2012 was eligible to enter into an agreement in reliance upon the Second Effective Date Extension Order in accordance with and subject to the terms and conditions of that order;24 this temporary no-action relief is provided on the condition that good faith preparations are being made to determine whether the swap counterparty is an ECP, and if applicable, come into compliance with Section 23.430 of the CFTC’s Regulations (requiring, among other things, that an SD/MSP verify that a counterparty meets the eligibility standards for an eligible contract participant before offering to enter into or entering into a swap with that counterparty).

Letter 12-17 also sets forth certain interpretations and no-action positions related to swap transactions involving non-ECPs, including:

 An interpretation that proceeds from a purchase money loan should be included when measuring whether “a corporation, partnership, proprietorship, organization, trust, or other entity . . . has total assets exceeding $10,000,000” and thus qualifies as an ECP under Section 1(a)(18)(A)(v)(I) of the CEA.  No-action relief for persons relying on the definition of “investments” developed in construing the scope of “qualified purchasers” under Section 2a(51) of the Investment Company Act of 1940 when determining whether an individual has sufficient “amounts invested on a discretionary basis” to qualify as an ECP under Section 1a(18)(A)(xi) of the CEA.25  Two no-action positions related to certain swaps entered into by a non-ECP to manage the floating interest rate risk associated with a loan received, or reasonably likely to be received.

RELIEF FOR SWAPS WITH UTILITY SPECIAL ENTITIES FROM DE MINIMIS THRESHOLD On October 12, 2012, the CFTC issued No-Action Letter 12-18 (“Letter 12-18”)26 providing limited temporary no-action relief related to the treatment of transactions with certain Special Entities27 under the de minimis exemption from the requirement to register as a swap dealer. As background, the Entity Definitions exempt a person from the requirement to register as a swap dealer if it engages in no more than a de minimis amount of swap dealing activities, where a de minimis amount is generally $8 billion but, with respect to transactions with Special Entities, $25 million. Letter 12-18 provides an increased de minimis threshold of $800 million with respect to certain swap dealing transactions with a special entity

-8- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

that: (i) owns or operates electric or natural gas facilities or electric or natural gas operations (or anticipated facilities or operations), (ii) supplies natural gas and/or electric energy to other utility special entities, (iii) has public service obligations (or anticipated public service obligations) under Federal, State or local law or regulation to deliver electric energy and/or natural gas service to utility customers, or (iv) is a Federal power marketing agency as defined in Section 3 of the Federal Power Act (16 U.S.C. 796(19)) (any of (i)-(iv), a “Utility Special Entity”). Letter 12-18 applies to a swap that (1) has at least one Utility Special Entity counterparty, (2) is being used by a Utility Special Entity counterparty for the purpose of hedging a physical position as described in Section 1.3(ggg)(6)(iii) of the CFTC’s Regulations, and (3) is related to an exempt commodity in which both parties to the swap transact as part of the normal course of their physical energy business (a “Utility Commodity Swap”). Letter 12-18 permits a person not to register as a swap dealer provided that:

 the “utility commodity swaps” connected with the person’s swap dealing activities into which the person – or any other entity controlling, controlled by or under common control with the person – enters over the course of the immediately preceding months (or following October 12, 2012, if that period is less than 12 months) have an aggregate gross notional amount of no more than $800 million;  the person is not otherwise within the definition of the term “swap dealer”; and  the person is not a “financial entity,” as defined in section 2(h)(7)(C)(i) of the CEA.28

A person relying on relief under Letter 12-18 must provide notice of its reliance by December 31, 2012 and thereafter on a quarterly basis. The notice must identify the Utility Special Entities with which the person has entered into Utility Commodity Swaps connected with its dealing activities and, with respect to each such Utility Special Entity, the gross notional value of Utility Commodity Swaps connected with dealing activities. This no-action relief will be in effect until the effective date of CFTC action with respect to a certain petition received from the American Public Power Association and certain other industry participants for relief related to swap dealing activity with utilities that qualify as Special Entities.29

BONA FIDE HEDGING UNDER CFTC REGULATION 4.5 On October 12, 2012, the CFTC issued Staff Interpretive Letter 12-19 (“Letter 12-19”)30 that provides interpretive guidance for calculating whether a registered investment company meets certain commodity interest trading thresholds prerequisite to being excluded from the definition of a “commodity pool operator” under Rule 4.5 of the CFTC’s Regulations.31 These thresholds (the “Rule 4.5 Thresholds”) are set as (1) an aggregate initial margin of commodity interest positions of five percent of the liquidation value of the pool’s portfolio, and (2) the aggregate net notional value of commodity interest positions does not exceed 100 percent of the liquidation value of the pool’s portfolio. In measuring whether either of the Rule 4.5 Thresholds is exceeded, Rule 4.5(c)(2)(iii) of the CFTC’s Regulations provides that any position that qualifies as a “bona fide hedging” position under the amended CFTC Rule 1.3(z)(1) or Rule 151.5 is excluded when calculating either threshold.32

-9- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

Letter 12-19 responds to a recent court decision, see International Swaps & Derivatives Ass’n v. CFTC, _ F. Supp. 2d. _, 2012 WL 4466311 (D.D.C. Sept. 28, 2012) (the “Position Limits Decision”), that vacated both amended Rule 1.3(z)(1) and Rule 151.5. In particular, the Hedging Interpretation provides that for purposes of interpreting whether the Rule 4.5 Thresholds have been met, the CFTC will continue to read Rule 4.5(c)(2)(iii) as excluding positions that would qualify as bona fide hedging positions under Rule 1.3(z)(1) and Rule 151.5, and will continue to incorporate the substance of the now-vacated rules.

RELIEF FOR FOREIGN EXCHANGE FORWARDS AND SWAPS On October 12, 2012, the CFTC issued No-Action Letter 12-21 (“Letter 12-21”)33 providing limited temporary no-action relief with respect to inclusion of foreign exchange forwards and foreign exchange swaps34 (“FX Products”) in the assessment of whether an entity has to register as an SD, MSP, CPO or CTA. Under Title VII, the Secretary of the Treasury may determine to exempt FX Products from the definition of “swap.”35 Treasury has proposed but not yet finalized a determination to exempt FX Products from the definition of swap.36

Letter 12-21 provides no-action relief:

 For an entity that excludes from its De Minimis Calculations any FX Product that is covered by a Treasury Exemption that is effective prior to December 31, 2012. Provided, however, that if by December 31, 2012, an entity enters into other types of swaps in connection with its swap dealing activities in excess of any of the gross notional amount thresholds under CFTC Regulation § 1.3(ggg)(4)(i), then FX Products must be considered for purposes of such entity’s determination of the date by which it must apply to be registered as an SD.  For an entity that excludes from its MSP Exposure calculations any FX Product that is covered by a Treasury Exemption that is effective prior to December 31, 2012.  A person who operates a collective investment vehicle that trades FX Products or a person who provides advice concerning FX Products, and would have to apply to be registered as a CPO or CTA solely as a result of these activities if a Treasury Exemption effective prior to December 31, 2012 is adopted. Letter 12-21 does not explain how potential registrants relying on the no-action relief will be treated if no Treasury Exemption that is effective prior to December 31, 2012 is adopted.

EXTRATERRITORIAL RELIEF On October 12, 2012, the CFTC issued No-action Letter 12-22 (“Letter 12-22”) that provides temporary relief for identifying swaps in the extraterritorial context that should be included in calculating whether a person (1) qualifies for the de minimis exemption from the definition of “swap dealer”, or (2) has current uncollateralized or potential futures exposure requiring registration as a major swap participant (the “SD/MSP Calculations”).37 The CFTC has previously proposed guidance for applying the definitions of swap dealer and major swap participant in the extraterritorial context (the “Proposed Extraterritorial Guidance”), which remains to be finalized.38 The Proposed Extraterritorial Guidance includes a definition of a “U.S. person” and permits a non-U.S. person to exclude certain swaps entered into with another non- -10- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

U.S. person from its SD/MSP Calculations.39 Letter 12-22 notes that industry participants have come to adopt differing views of the definition of U.S. person in the Proposed Extraterritorial Guidance. To provide “a uniform and readily ascertainable standard regarding which swaps . . . must be included” in the SD/MSP Calculations, the Proposed Extraterritorial Guidance identifies a set of entities swaps with which may count towards the SD/MSP calculations. The entities comprising this set are:

i. A natural person who is a resident of the United States; ii. A corporation, partnership, limited liability company, business or other trust, association, joint- stock company, fund or any form of enterprise similar to any of the foregoing (a “legal entity”), in each case that is organized or incorporated under the laws of the United States; iii. A pension plan for the employees, officers or principals of a legal entity described in (ii) above, unless the pension plan is exclusively for foreign employees of such entity; iv. An estate or trust, the income of which is subject to U.S. income tax regardless of source; or v. An individual account (discretionary or not) where the beneficial owner is a person described in (i) through (iv) above.

(each of (i)-(v), a “Temporary U.S. Person”). Letter 12-22 permits a person that is not a Temporary U.S. Person (a “Temporary non-U.S. Person”) to exclude a swap with another Temporary non-U.S. Person from its SD/MSP Calculations if such swap is executed by the earlier of Dec. 31, 2012 or the effective date of the CFTC action finalizing the definition of U.S. Person contained in the Proposed Extraterritorial Guidance. Notably, this relief applies irrespective of guarantees extended to or by either counterparty so long as both counterparties are Temporary non-U.S. Persons. For purposes of determining whether the counterparty qualifies as a Temporary non-U.S. Person, Letter 12-22 indicates that a person may rely on representations provided by its counterparty.40

In contrast to the non-exhaustive definition of U.S. person in the Proposed Extraterritorial Guidance, the definition of Temporary U.S. Person does not include:

i. A legal entity with a principal place of business in the United States; ii. A legal entity in which the direct or indirect owners are responsible for the liabilities of such entity and one or more of such owners is a U.S. person; iii. Any commodity pool, pooled account, or collective investment vehicle (whether or not it is organized or incorporated in the U.S.) of which a majority ownership is held, directly or indirectly, by a U.S. person; or iv. Any commodity pool, pooled account, or collective investment vehicle the operator of which would be required to register as a commodity pool operator under the CEA. Letter 12-22 also provides no-action relief from having to include a swap in the SD/MSP Calculations of a Temporary non-U.S. Person if the swap is entered into with a non-U.S. branch of a Temporary U.S. Person that meets the definition of swap dealer and represents that it intends to register with the CFTC as a swap dealer by March 31, 2013.

-11- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

SWAPS ENTITIES GUIDANCE On October 12, 2012, the CFTC issued Frequently Asked Questions (“Swaps Entity FAQ”)41 addressing the definitions of swap dealer and major swap participant, noting that in the future, the CFTC may continue to release additional clarifying information in response to questions submitted by market participants, as necessary.

With regard to calculating notional amounts for the swap dealer de minimis test, the Swaps Entity FAQ clarified that:

 For locational basis swaps referencing only one physical commodity, the notional amount should be calculated using the difference in fair market value of the physical commodity at the two locations, multiplied by the number of units referenced in the swap.  A swap that is executed as part of an exchange-of-futures-for-swaps transaction in which a swap transaction is executed and subsequently exchanged for a futures contract, and the resulting position is then cleared as a futures position, would count toward the thresholds under the de minimis exception from the “swap dealer” definition, to the extent the exchange-of-futures-for- swaps transaction was entered into in a swap dealer capacity.

With regard to the insured depository institution (“IDI”) loan exception42, the Swaps Entity FAQ clarified that:

 If an IDI enters into a swap agreement with a borrower in anticipation of funding a loan within the following 90 days, and the loan (for whatever reason) does not fund within the following 90 days, the swap would not qualify for the exception.

With regard to Major Swap Participants, the Swaps Entity FAQ clarified that:

 A person should begin to calculate its daily average exposures for purposes of the major swap participant definition on October 12, 2012, and if a person meets the criteria during the 4th Quarter of 2012, that person must register within 2 months after the end of that Quarter (i.e., the end of February 2013).43

The Swaps Entity FAQ contain additional clarifications that may be of interest to swap market participants.

REPORTING GUIDANCE The CFTC also issued two sets of responses to questions related to reporting topics, one covering the initial dates on which reporting would be required (the “Reporting Timing Q&A”)44 and the other covering reporting of cleared swaps (the “Cleared Swaps FAQ”).45

A. REPORTING TIMING Q&A

Under the reporting rules established under Parts 43 (specifying real-time reporting obligations)46, Part 45 (specifying regulatory reporting and recordkeeping obligations)47 and Part 46 (specifying historical reporting and recordkeeping obligations)48 (Parts 43, 45 and 46 collectively, the “Reporting Rules”), swap -12- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

dealers and major swap participants are subject to accelerated reporting requirements that require reporting of credit and interest rate swaps on October 12, 2012 and all other swaps on January 10, 2013. Persons that are neither swap dealers nor major swap participants (“end-users”) become subject to reporting obligations on April 10, 2013. Each of the Reporting Rules establishes a hierarchy that determines as between types of counterparties which of them will report the trade (the “reporting counterparty”).49 The Reporting Timing Q&A confirms that persons would not be required to be registered as swap dealers earlier than December 31, 2012 or major swap participants earlier than February 28, 2013 (though earlier registration is allowed). The Reporting Timing Q&A also confirms that an entity that is not registered as a swap dealer or major swap participant prior to the applicable deadline is deemed not to be a swap dealer or major swap participant. Because the initial registration deadlines follow the reporting deadlines applicable to swap dealers and major swap participants, questions had been raised as to the timing of reporting obligations with respect to swaps to which one or more counterparty was a prospective swap dealer or major swap participant.

The Reporting Timing Q&A confirms that notwithstanding the October 12, 2012 date under the Reporting Rules, the reporting party would not be required to report credit or interest rate swaps earlier than (i) the date it registers as an SD or MSP, (ii) the date it is required to register as an SD or MSP, and (iii) April 10, 2013 (i.e., the date on which reporting obligations become applicable to all reporting counterparties) (the “Credit Reporting Date”). Similarly, the Reporting Q&A confirms that notwithstanding the January 10, 2013 date under the Reporting Rules, the reporting party would not be required to report other classes of swaps earlier than (i) the date it registers as an SD or MSP, (ii) the date it is required to register as an SD or MSP, and (iii) April 10, 2013 (i.e., the date on which reporting obligations become applicable to all reporting counterparties). In short, a person would not be subject to the accelerated reporting deadlines to SD/MSPs until the person registers or is required to register as such. Accordingly, swaps entered into prior to the applicable reporting deadline would be treated as historical swaps. Furthermore, requirements to obtain a legal entity identifier (“LEI”) would not apply prior to it initially becoming required to report a swap (or, if it is not the reporting counterparty for any swap, within 180 days of the applicable compliance date).

B. CLEARED SWAPS FAQ

The Cleared Swaps FAQ responds to a number of frequently asked questions regarding the reporting of cleared swaps. Importantly, the Cleared Swaps FAQ confirms that reporting requirements apply separately to the initial swap entered into between counterparties (the “original swap”) and the two swaps resulting from the novation of the original swap to the derivatives clearing organization (the “resulting swaps”).

With respect to the original swap, the Cleared Swaps FAQ clarifies who must report creation data, which consists of primary economic terms data and confirmation data, and continuation data for the swap under Part 45 as follows: -13- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

 If the original swap is executed on a swap execution facility (“SEF”) or DCM, the SEF/DCM is required to report creation data in a single report to a swap data repository (“SDR”).  If the original swap is executed off-facility and the swap is accepted for clearing prior to the applicable primary economic terms (“PET”) data deadline50, then the DCO must report creation data in a single report as soon as technologically practical after clearing.  If the original swap is an off-facility swap and is not accepted for clearing prior to the PET data deadline, the reporting counterparty must report PET data as soon as technologically practical after execution but no later than the applicable PET data deadline. Confirmation data and, pending submission of the original swap for clearing, continuation data must also be reported with respect to the original swap.

Once the original swap is accepted for clearing, the Cleared Swaps FAQ confirms that reporting obligations with respect to the original swap are terminated. With respect to reporting the resulting swaps under Part 45, the Clearing Swaps FAQ explains that:

 DCOs must report (a) creation data in a single report as soon as technologically practical after execution, and (b) valuation data daily.  If the opposing counterparty to a resulting swap is a SD/MSP, the SD/MSP will also report continuation data for the swap including its daily mark.  If the opposing counterparty to a resulting swap is a non-SD/MSP, there are no continuing part 45 reporting obligations after acceptance for clearing.

* * *

Copyright © Sullivan & Cromwell LLP 2012

-14- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

ENDNOTES 1 In discussing the letters and other issuances, this memorandum does not distinguish between the CFTC and its various divisions. 2 With respect to the Entity Definitions, see Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” 77 Fed. Reg. 30596 (May 23, 2012) available at http://www.cftc.gov/ucm /groups/public/@lrfederalregister/documents/file/2012-10562a.pdf. For further information on these rules, see our Memorandum to Clients, dated June 8, 2012, entitled “CFTC and SEC Issue Final Swap-Related Rules Under Title VII of Dodd-Frank”. With respect to the Product Definitions, see “Further Definition of ‘Swap,’ ‘Security-Based Swap,’ and ‘Security-Based Swap Agreement’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping”, 77 Fed. Reg. 48207 (August 13, 2012), available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister /documents/file/2012-18003a.pdf. For further information on these rules, see our Memorandum to Clients, dated August 27, 2012, entitled “Final Product Definitions Under Title VII of Dodd- Frank”. 3 Specifically, the effective date of the “security-based swap” definition will be Feb. 11, 2013 for purposes of (1) Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection with the Pending Revisions of the Definition of “Security” to Encompass Security-Based Swaps, and Request for Comment, 76 Fed. Reg. 39927 (July 7, 2011), and (2) Exemptions for Security-Based Swaps, 76 Fed. Reg. 40605 (July 11, 2011). 4 To the extent that the CFTC revises its guidance following the initial release of such guidance, this memorandum may not account for such revisions. 5 See Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions, 77 Fed. Reg. 6336 (Feb. 7, 2012). 6 See Staff No-Action Relief (CFTC Letter No. 12-10): Preservation of the Regulatory Status Quo With Respect to Swaps Cleared by a DCO (and Related) Collateral (Oct. 10, 2012) available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-10.pdf. Pursuant to this no-action letter, compliance will also not be required with respect to statutory requirements as to: (i) permitted use of funds deposited as Customer Swaps Collateral; and (ii) permitted investments for Customer Swaps Collateral. 7 See Section 4d(f)(5). 8 Staff No-Action Relief (CFTC Letter No. 12-11): Preservation of the Regulatory Status Quo with Respect to Certain CEA Provisions That May Apply to TROs, ISO, and/or Their Participants (Oct. 11, 2012) available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/ 12-11.pdf. 9 See Proposed Order and Request for Comment on a Petition From Certain Independent System Operators and Regional Transmission Organizations To Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Commission or the Public Utility Commission of Texas From Certain Provisions of the Commodity Exchange Act, 77 Fed. Reg. 52137 (Aug. 28, 2012). 10 See Staff No-Action Relief (CFTC Letter No. 12-12): Preservation of the Regulatory Status Quo with Respect to certain CEA Provisions That May Apply to FPA Section 201(f) Entities and Other Electric Cooperatives (Oct. 11, 2012) available at http://www.cftc.gov/ucm/groups/public/ @lrlettergeneral/documents/letter/12-12.pdf. 11 See Proposal To Exempt Certain Transactions Involving Not-for-Profit Electric Utilities; Request for Comments, 77 Fed. Reg. 50998 (Aug. 23, 2012).

-15- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

ENDNOTES (CONTINUED) 12 Staff Interpretive Letter (No. 12-13): Request for Interpretation of the Definition of “Commodity Pool” under Section 1a(10) of the Commodity Exchange Act (Oct. 11, 2012), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-13.pdf. 13 The REIT Interpretive Letter summarizes these two requirements as limiting permitted sources of income so that: (1) at least 75 percent of the REIT’s annual gross income must be derived from certain qualifying real estate-related sources, including, but not limited to, interests in real property, and gains from the sale of non-dealer property; and (2) at least 95 percent of the REIT’s annual gross income must consist of items that would satisfy the 75 percent test, plus other passive income such as interest and dividends. 14 Staff Interpretive Letter (No. 12-14): Request for Exclusion from Commodity Pool Registration for Securitization Vehicles (Oct. 11, 2012), available at http://www.cftc.gov/ucm/groups/public /@lrlettergeneral/documents/letter/12-14.pdf. 15 Letter 12-14 indicates that other forms of financings or investments with respect to which relief was requested, however, may involve entities which would be defined as commodity pools. In particular, Letter 12-14 states the request for general relief for entities operating to some extent under any covered bond statute, entities involved in collateralized debt obligations, entities involved in collateralized loan obligations, any insurance-related issuances, and any other synthetic securitizations would be overly broad. In response to arguments that securitization vehicles do not meet the criteria articulated by the Ninth Circuit in Lopez v. Dean Witter Reynolds Inc., 805 F.2d 880 (9th Cir. 1986), the Securitization Interpretive Letter indicates that “although the Lopez factors are useful, they are not dispositive and the failure of a fund to satisfy one or more of the factors does not mean that the fund is not a pool.” 16 Letter 12-14 explains that the term “financial asset” does not include transactions whereby an entity obtains exposure to an asset that is not transferred or otherwise part of the asset pool. 17 Staff No-Action Letter No. 12-15: Registration Relief for Certain Persons (Oct. 11, 2012), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-15.pdf. 18 These contracts are, in the case of ICE, those involved in the transition of ICE cleared over-the- counter energy swap products to energy futures and options contracts traded on ICE Futures US and ICE Futures Europe; and, in the case of NYMEX, those involved in the transition of certain energy transactions submitted for clearing through CME ClearPort via Exchange of Futures for Risk transactions to energy transactions executed off the centralized market, but subject to NYMEX’s rules and submitted for clearing as futures and options transactions. 19 Among the reasons cited for the delay in the registration requirements was the “potentially hundreds of, and possibly several thousand, registration applications” to be submitted for processing to the NFA. Registration No-Action Letter at p. 4. 20 Staff No-Action Relief (CFTC Letter No. 12-16): Cleared Swaps in Agricultural and Exempt Commodities and Swaps Exchanged for Futures Not to be Considered in Calculating Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis Exception (Oct. 12, 2012) available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-16.pdf. Staff No-Action Relief (CFTC Letter No. 12-20): Swaps in Agricultural and Exempt Commodities Not to be Considered in Calculating Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis Exception and Calculation of Whether a Person is a Major Swap Participant (Oct. 12, 2012) available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/ letter/12-20.pdf. 21 Staff Interpretive and No-Action Relief (CFTC Letter No. 12-17): Swap Guarantee Arrangements; Jointly and Severally Liable Counterparties; Amounts Invested on a Discretionary Basis; and “Anticipated ECPs” (Oct. 12, 2012) available at http://www.cftc.gov/ucm/groups/public /@lrlettergeneral/documents/letter/12-17.pdf. 22 See id. at 48226. -16- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

ENDNOTES (CONTINUED) 23 The ECP Letter indicates that its interpretation is limited to guarantees of swaps and does not address other potential credit support arrangements or issues raised by commentators in response to the further definition of “eligible contract participant” except as expressly addressed in the ECP Letter. See ECP Letter at n.15. 24 See Second Amendment to July 14, 2011 Order for Swap Regulation, 77 Fed. Reg. 41260 (July 13, 2012) (the “Second Amended July 14 Order”). The Second Amended July 14 Order provides “the following guidance as to how [the CFTC] intends to exercise its enforcement discretion with respect to certain unintentional violations of section 2(e) by swap counterparties who are making good faith efforts to comply with section 2(e). . . . [W]here a person finds that it has entered into a swap with a counterparty that the [Commissions] later further define or interpret as not an ECP, absent other material factors, the [CFTC] will not bring an enforcement action for violation of section 2(e) if the person has implemented and followed reasonably designed policies and procedures to verify the ECP status of a swap counterparty and, notwithstanding good faith compliance with such policies and procedures, the person enters into a swap with a non- ECP counterparty.” 25 Section 1a(18)(A)(xi) of the CEA provides that the definition of “eligible contract participant” includes “an individual who has amounts invested on a discretionary basis, the aggregate of which is in excess of” $10,000,000 or, if the agreement is entered into so as to manage risk associated with an asset owned or liability incurred (or reasonably likely to be owned or incurred), $5,000,000. 26 See Staff No-Action Relief (CFTC Letter No. 12-18): Temporary Relief from the De Minimis Threshold for Certain Swaps with Special Entities (Oct. 12, 2012) available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-18.pdf. 27 The term Special Entity is defined to mean a State, municipality, State or Federal agency, pension plan, governmental plan, or endowment. 28 The term “financial entity” is generally defined for these purposes to mean: (1) a swap dealer; (2) a security-based swap dealer; (3) a major swap participant; (4) a major security-based swap participant; (5) a commodity pool; (6) a private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80-b-2(a)); (7) an employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002); (8) a person predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature, as defined in section 4(k) of the Bank Holding Company Act of 1956. 29 See Petition for rulemaking dated July 12, 2012 from the American Public Power Association, the Large Public Power Council, the American Public Gas Association, the Transmission Access Policy Study Group and the Bonneville Power Administration, available at http://sirt.cftc.gov/sirt/sirt.aspx?Topic=PendingFilingsandActionsAD&Key=23845. 30 Staff Interpretive Letter: Interpretation of Bona Fide Hedging in Commission Regulation 4.5: Restatement of Terms Incorporated by Reference (Oct. 12, 2012), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-19.pdf. 31 See id. 32 Notably, calculations under Rule 4.5 contrast with those under Rule 4.13(a)(3), which does not exclude bona fide hedging transactions from its calculations. 33 Staff No-Action Relief (CFTC Letter No. 12-21): Foreign Exchange Swaps and Foreign Exchange Forwards Not to be Considered in Calculating Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis Exception or in Calculating Substantial Position in Swaps or Substantial Counterparty Exposure for Purposes of the Major Swap Participant Definition; Time-Limited No action Relief for persons that meet the definitions of Commodity Pool Operators and Commodity Trading Advisors Solely as a Result of their Foreign Exchange Swap and Foreign Exchange -17- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

ENDNOTES (CONTINUED) Forward Activities (Oct. 12, 2012) available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-21.pdf. 34 Foreign exchange forwards are defined as those transactions that solely involve the exchange of two different currencies on a specific future date at a fixed rate agreed upon on the inception of the contract covering the exchange. Foreign exchange swaps are defined as those transactions that solely involve (A) an exchange of two different currencies on a specific date at a fixed rate that is agreed upon on the inception of the contract covering the exchange, and (B) a reverse exchange of those two currencies at a later date and at a fixed rate that is agreed upon on the inception of the contract covering the exchange. 35 If the Treasury Exemption is adopted, certain requirements applicable to “swaps” will nevertheless remain applicable to FX Products. 36 See Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, Notice of Proposed Determination, 76 Fed. Reg. 25774 (May 5, 2011). 37 Staff No-Action Relief (CFTC Letter No. 12-22): Swaps Only With Certain Persons to be Included in Calculation of Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis Exception and Calculation of Whether a Person is a Major Swap Participant (Oct. 12, 2012) available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/letter/12-22.pdf. 38 Cross Border Application of Certain Swaps Provisions of the Commodity Exchange Act, 77 Fed. Reg. 41214 (proposed July 12, 2012) (to be codified at 17 C.F.R. 1). The CFTC also proposed an exemptive order, that would provide temporary relief to swap dealers and major swap participants from certain of their regulatory obligations. See Exemptive Order Regarding Compliance With Certain Swap Regulations, 77 Fed. Reg. 41110 (proposed July 12, 2012) (to be codified at 17 C.F.R. 1). See Memorandum, Sullivan & Cromwell, CFTC Guidance on Extraterritoriality (July 12, 2012). 39 Based on the Proposed Extraterritorial Guidance, to determine whether a non-U.S. person qualifies for the de minimis exemption from the definition of “swap dealer”, only a limited set of transactions should be considered. These transactions are (i) swaps between such non-U.S. person or a non-U.S. affiliate of such non-U.S. person, on the one hand, and any U.S. person (other than a foreign branch of a U.S. person registered as a swap dealer), on the other hand, and (ii) swaps between such non-U.S. person or a non-U.S. affiliate of such non-U.S. person if such non-U.S person or non-U.S. affiliate is guaranteed by a U.S. person, on the one hand, and any other person, on the other hand. Similarly, based on the Proposed Extraterritorial Guidance, only certain swaps should be considered when assessing whether a non-U.S. person meets the definition of major swap participant. Specifically, in determining the swap exposure of a non-U.S. person, the non-U.S. person should consider only swaps: (i) between such non-U.S. person and a U.S. person, provided that such non-U.S. person’s obligations with respect to such swap are not guaranteed by a U.S. person, and (ii) between another non-U.S. person guaranteed by such non-U.S. person and a U.S. person. 40 Letter 12-22 cautions that it is not intended to, nor should it be construed to, indicate or limit the definition of the term U.S. person that the CFTC may adopt. 41 Staff Frequently Asked Questions (FAQ): Division of Swap Dealer and Intermediary Oversight (“DSIO”) Responds to FAQs About Swap Entities available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/swapentities_faq_final.pdf. 42 Dodd-Frank excludes from the analysis as to whether an entity is a “swap dealer” swap transactions by an insured depository institution to the extent it offers to enter into a swap with a customer in connection with originating a loan to that customer. See Section 1.3(ggg)(5) of the CFTC’s Regulations. -18- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

ENDNOTES (CONTINUED) 43 However, a person who exceeds the MSP thresholds by less than 20% would not be required to register immediately as a MSP, but would be required to register only if they exceeded any of the applicable daily average thresholds during the following fiscal quarter. 44 Staff Questions & Answers – On Start of Swap Data Reporting available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/startreporting_qa_final.pdf. 45 Staff Frequently Asked Questions (FAQ) on the Reporting of Cleared Swaps available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/clearedswapreporting_faq_fin al.pdf. 46 17 C.F.R. § 43 (2012). 47 17 C.F.R. § 45 (2012). 48 17 C.F.R. § 46 (2012). 49 The hierarchies determining the reporting counterparty under Parts 45 and 46 are the same, while the hierarchy under Part 43 differs from the other two. All three, however, generally require the SD to report the trade if it is transacting with an MSP or a non-SD/MSP, and the MSP to report the trade if it is transacting with a non-SD/MSP. 50 The deadlines for reporting PET data are specified under Section 45.3 of the CFTC’s regulations.

-19- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012

ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance, corporate and real estate transactions, significant litigation and corporate investigations, and complex restructuring, regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 800 lawyers on four continents, with four offices in the United States, including its headquarters in New York, three offices in Europe, two in Australia and three in Asia.

CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Jay Plum (+1-212-558-4049; [email protected]) in our New York office.

CONTACTS New York Whitney A. Chatterjee +1-212-558-4883 [email protected] David J. Gilberg +1-212-558-4680 [email protected] Marion Leydier +1-212-558-7925 [email protected] Kenneth M. Raisler +1-212-558-4675 [email protected] Robert W. Reeder III +1-212-558-3755 [email protected] Andrew S. Rowen +1-212-558-3896 [email protected] Rebecca J. Simmons +1-212-558-3175 [email protected] Saul P. Sarrett +1-212-558-4816 [email protected] Ilya Beylin +1-212-558-1674 [email protected] Christine Trent Parker +1-212-558-3631 [email protected] Washington, D.C. Eric J. Kadel, Jr. +1-202-956-7640 [email protected] Robert S. Risoleo +1-202-956-7510 [email protected] Dennis C. Sullivan +1-202-956-7554 [email protected]

-20- CFTC Relief and Guidance as the “Swap” Definition Takes Effect October 15, 2012 SC1:3318973.4