Tuesday, October 18, 2011

Senators Advise SEC and CFTC on Global Consistency of Derivatives Regulations

In a letter to the SEC and CFTC Chairs, four members of the Senate Banking Committee said that the Commissions should harmonize the substance and timing of derivatives regulations implementing Dodd-Frank with their international counterparts. The Senators advised the SEC and CFTC that the final derivatives regulations should limit their scope, taking into account the regulation of derivatives in other jurisdictions. The fluid nature of the derivatives markets underscores the need for the international derivatives regulatory framework to be as consistent as possible between major financial jurisdictions. The Senators emphasized that harmonized regulations will lower the risk of regulatory arbitrage and help ensure US markets remain globally competitive. The letter was signed by Senators David Vitter (R-LA), Mike Johans (R-NE), Pat Toomey (R-PA), and Mike Crapo (R-ID).

The Senators are concerned about the potential implications of extending Title VII of Dodd-Frank to non-US jurisdictions and that recent SEC and CFTC proposals do not realistically address the potential issues this could raise for the global swaps market. The SEC and CFTC are asked to provide a written explanation by November 15 detailing how the Commissions will apply their regulations to cross-border transactions and to non-US swap market participants that register in the US, including the regulation of these entities and the treatment of interaffiliate swaps and guaranties. As part of the response, the SEC and CFTC should also indicate what requests for comment they will publish on extraterritorial issues, including the approaches on regulating cross-border activities on which comment will be requested.

The swaps market has developed with recognition by regulators that individual nations have jurisdiction over the activities within their borders. Given recent actions and statements by US regulators, the Senators are concerned about proposals that could create uncertainty as to how the additional regulations could apply cross-border and alter regulatory precedent. Similarly, the regulations do not take into account the emerging regulation of swaps in the European Union and other countries in response to the G-20 agreement to enhance the swaps regulation globally.

In the view of the Senators, problems for global swaps arise in many context in the Commissions’ proposals. For example, requiring swap dealer registration of off-shore swap dealers would subject them to capital and margin regulations for their global businesses, said the Senators, an approach that gives no credit to requirements in their home jurisdictions and may be inconsistent with these developing requirements.
Also, US clearing and exchange trading requirements would apparently apply to cross-border transactions, which may directly conflict with requirements in other countries. In addition, on their face, the proposals would regulate swaps between global affiliates and cross-border guarantees, which are key means of reducing risk and raise few regulatory issues.

The potential ramifications of regulations being applied extraterritorially are of key importance to institutions when determining how and where to conduct business. According to Fed Chair Ben Bernanke, US firms could be placed at a significant competitive disadvantage if other jurisdictions do not follow the proposed US margin rules. The Senators asked the regulators to reconsider the proposed margin rules and their application to non-US based affiliates of US institutions.