An ongoing challenge for securities and banking regulators—especially for the Commodity Futures Trading Commission in its post-Dodd-Frank rulemaking—is how to best comport with international regimes that may not mesh well with domestic derivatives rules.
CFTC Chairman J. Christopher Giancarlo has frequently addressed the topic in the past, but perhaps never as comprehensively as he does in a newly released white paper he authored, “Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach With Deference to Comparable Non-U.S. Regulation.”
Based on the principles he suggests in the white paper, Giancarlo intends to direct the CFTC staff to put forth new rule proposals to address a range of cross-border issues in swaps reform.
“I have been a constant supporter of the swaps market reforms passed by the U.S. Congress in Title VII of the Dodd-Frank Act and the commitments made by the G20 leaders in Pittsburgh in 2009,” said Giancarlo. “Those are clearing standardized swaps through central counterparties, reporting swaps to trade repositories, and trading standardized swaps on regulated trading platforms. However, I have long said that I hold reservations about the CFTC’s current approach to applying its swaps rules to cross-border activities.”
This paper identifies a number of adverse consequences of the CFTC’s cross-border approach, including the following:
It is expressed in “guidance” rather than formal regulation subject to the Administrative Procedure Act.
It is over-expansive, unduly complex, and operationally impractical, increasing transaction costs and reducing economic growth and opportunity.
It relies on a substituted compliance regime that encourages a somewhat arbitrary, rule-by-rule comparison of CFTC and non-U.S. rules under which a transaction or entity may be subject to a patchwork of CFTC and non-U.S. regulations.
It shows insufficient deference to non-U.S. regulators that have adopted comparable G20 swaps reforms and is inconsistent with the CFTC’s longstanding approach of showing comity to competent non-U.S. regulators in the regulation of futures.
The white paper recommends several improvements to the CFTC’s cross-border approach that are supportive of the G20 swaps reforms and aligned to Congressional intent. Among those recommendations:
Expand the use of the CFTC’s exemptive authority for non-U.S. CCPs that are subject to comparable regulation in their home country and do not pose substantial risk to the U.S. financial system, permitting them to provide clearing services to U.S. customers indirectly through non-U.S. clearing members that are not registered with the CFTC.
Non-U.S. Trading Venues
End the current bifurcation of the global swaps markets into separate U.S. person and non-U.S. person marketplaces by exempting non-U.S. trading venues in regulatory jurisdictions that have adopted comparable G20 swaps reforms from having to register with the CFTC as swap execution facilities, thereby permitting such jurisdictions to each function as a unified marketplace, under one set of comparable trading rules and under one competent regulator.
Non-U.S. Swap Dealers
Require registration of non-U.S. swap dealers whose swap dealing activity poses a “direct and significant” risk to the U.S. financial system; take into account situations where the risk to the U.S. financial system is otherwise addressed, such as swap transactions with registered swap dealers that are conducted outside the United States; and show appropriate deference to non-U.S. regulatory regimes that have comparable requirements for entities engaged in swap dealing activity.
Clearing and Trade Execution Requirements
Adopt an approach that permits non-U.S. persons to rely on substituted compliance with respect to the swap clearing and trade execution requirements in Comparable Jurisdictions, and that applies to those requirements in Non-Comparable Jurisdictions if they have a “direct and significant” effect on the United States.
Take a territorial approach to U.S. swaps trading activity, including trades that are “arranged, negotiated, or executed” within the United States by personnel or agents of such non-U.S. persons. Nonincidental swaps trading activity in the United States should be subject to U.S. swaps trading rules. Such an approach addresses the current fragmentation of U.S. swaps markets, with some activity subject to CFTC rules and some activity not subject to CFTC rules. This approach is consistent with the principle—one unified marketplace, under one set of comparable trading rules and under one competent regulator.
Should the proposals find approval with Giancarlo’s full Commission, the resulting rulemakings would replace the cross-border guidance issued by the CFTC in 2013 and the cross-border rules proposed by the CFTC in 2016, as well as address certain positions taken in CFTC staff advisories and no-action letters.