Since the passage of the Dodd-Frank Act, U.S. regulators have struggled with how to apply new rules, in particular swaps regulations, in the context of a global marketplace.
The debate has been a contentious one among regulators and those they oversee. Even a unanimous vote Friday by the CFTC, on interpretive guidance regarding the cross-border application of swaps provisions, is no indication of solidarity on the matter. Last minute haggling among commissioners reportedly delayed what was to be a public vote on Thursday, leading instead to a private vote the following day.
On June 29, the CFTC approved for public comment proposed guidance that interprets Section 2(i) of the Commodity Exchange Act, which states that its swaps provisions 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.
It would interpret the term “U.S. person” by the extent to which swap activities or transactions have a relevant effect on U.S. commerce and help determine whether foreign entities engaging in swap dealing transactions with “U.S. persons” would be required to register and be regulated as swap dealers.
A non-U.S. swap dealer or non-U.S. major swap participant would need to comply with what are deemed as “comparable and comprehensive” foreign regulatory requirements in order to satisfy applicable statutory and regulatory requirements under the Dodd-Frank Act.
The Commission would determine comparability for “substituted compliance” by taking into consideration the “scope and objectives” of the regulatory requirements, the comprehensiveness of the foreign regulator's supervisory compliance program, and the foreign regulator's authority to support and enforce its oversight of the non-U.S. swap dealer or non-U.S. major swap participant.
The proposal includes a tiered approach for foreign swap dealer requirements. Some would be considered entity-level, such as for capital, chief compliance officer, swap data recordkeeping, reporting to swap data repositories and large trader reporting. Others would be considered transaction-level, such as clearing, margin, real-time public reporting, trade execution, trading documentation and sales practices.
U.S. facing transactions would include not only transactions with persons or entities operating or incorporated in the United States, but also those with their overseas branches. This would include transactions with foreign affiliates that are guaranteed by a U.S. entity, as well as the foreign affiliates operating as conduits for a U.S. entity's swap activity. Foreign swap dealers, as well as overseas branches of U.S. swap dealers, in certain circumstances, may rely on substituted compliance for transactions with foreign affiliates guaranteed by, or operating as, conduits of U.S. entities.
Public comments on the new guidance will be solicited for 45 days following publication in the Federal Register.
In a statement, Commissioner Jill Sommers said she ultimately supported putting these proposals out for comment, hopeful that the feedback will encourage the Commission to “adopt a final rule that will rely on mutual recognition of all global regulatory regimes in a manner that avoids costly, burdensome duplicative regulations.”
A Proposed Interpretive Guidance and Policy Statement released on June 1 was guided by the premise that “every single swap a U.S. person enters into, no matter what the swap or where it was transacted, was stated to have a direct and significant connection with activities in, or effect on, commerce of the United States.”
“All G20 nations agreed to comprehensive regulation of swap markets and we should rely on their regional expertise,” she said, adding that while the current document acknowledges the concept of substituted compliance, “it is extremely vague with respect to what the Commission will be considering in making these determinations.”
Sommers said overseas market failures do not “justify the implication that other nations are not capable of effective regulation.”
“Not only have we failed to coordinate with foreign regulators on a global cross-border approach, we have failed to coordinate with our fellow domestic regulators,” she said.
Sommers and Commissioner Scott O'Malia also questioned the semantics of the issuance being “Interpretive Guidance” rather than an “Interpretive Rule.” Doing so is an attempt to skirt the need for a cost-benefit analysis and could lead to litigation, they warned.