CFTC Divisions Interpret "U.S. Person" Definition and U.S. Location Versus Foreign Location

On May 21, 2025, the Commodity Futures Trading Commission ("CFTC") announced that its Market Participants Division and Division of Market Oversight ("Divisions") had issued an interpretative letter to a proprietary trading firm ("Prop Firm"), whose main office and headquarters are offshore, providing the Divisions' views on the meaning of four terms used in the agency's guidance and regulations in the context of certain cross-border derivatives activity. The terms bear on whether certain persons must register and/or comply with various regulatory obligations when undertaking that cross-border activity. In the letter, the Divisions confirmed that neither the Prop Firm's current activities nor its proposed activities (including hiring U.S.-based traders and others to be employed by an affiliate also organized offshore) implicated relevant registration or compliance provisions.

The relevant terms and regulations/guidance are as follows: 

• "Foreign located person";
• "Person located in the United States";
• "Participant located in the United States"; and 
• "U.S. person" (as used in § 23.23(a)(23) and the CFTC cross-border guidance).

These concepts lend themselves to various outcome-oriented interpretations, depending on how strict or lenient the CFTC wants to be in applying its regulatory scheme to entities that have both U.S. and foreign connections. For instance, a single employee in the United States could be viewed as meaning that the employee's foreign-based employer is located in the United States. Or the CFTC could take the view that only the headquarters, place of organization, or principal place of business matters for determining U.S. location or U.S. person status. Or the CFTC could leave itself some discretion to consider the facts and circumstances of each situation.

The first two approaches give certainty but may be viewed as too simplistic and/or too strict or lenient, depending on who leads the CFTC at a given time. The third approach allows the CFTC to apply its regime, or not, to entities depending on their unique facts. While the third approach may be seen as more fair and/or appropriate, it may alternatively be seen as allowing the CFTC to apply its regime in circumstances where it shouldn't or to create new tests without prior notice, as then-CFTC Commissioner Pham indicated in her concurring statement in In re Falcon Labs Ltd. ("FalconX").

Then-Commissioner Pham expressed concern that the CFTC's FalconX settlement relied on a newly crafted test relying on various factors (including the location of the ultimate beneficial owners in the United States) to look through a non-U.S. legal entity to find that it was located in the United States. Regardless of how one views the third approach, it does not provide a great deal of certainty to market participants for planning purposes; moreover, what certainty may be provided tends to be only intermittent in the form of enforcement actions, published staff letters and non-public, informal staff guidance.

The Divisions' interpretative letter is guided by the principle that "customer protection efforts be left to local authorities in areas where neither domestic customers [n]or intermediaries are involved." Although some of the Prop Firm's facts may have allowed it to avoid the CFTC's swap regulatory regime (for example, the fact that it was operated from outside the United States fit within the cross-border guidance concept that an investment vehicle generally would be viewed as a non-U.S. person if it's controlled from outside the United States), the application of existing guidance to those facts was subject to caveats. One caveat is that the principal place of business examples in the CFTC's cross-border guidance on collective investment vehicles are not intended to be exclusive or to preclude a determination that any particular collective investment vehicle has its principal place of business in the United States. 

The application of existing guidance to the Prop Firm's facts was also subject to interpretation: the CFTC said in its cross-border guidance that, depending on a collective investment vehicle's investment strategy, control may be exhibited by "those responsible for investment selections, risk management decisions, portfolio management, or trade execution[,]" which could lead to different outcomes if those personnel were inside or outside the United States. Because the Prop Firm also trades futures on foreign exchanges, there was some concern that a FalconX-like approach would lead the Prop Firm's foreign brokers and the foreign exchanges it trades on to offboard it lest they be required to register with the CFTC in one or more categories or face CFTC compliance obligations. 

These kinds of repercussions give potential counterparties and other market participants pause. By issuing the interpretative letter, the Divisions provided a measure of certainty for as long as the letter is in force.