Thursday, November 03, 2011

House Legislation Would Bring Certainty to Global Swaps Markets

Bi-partisan legislation introduced by Rep. Scott Garrett (R-NJ), Chairman of the Financial Services Subcommittee on Capital Markets and Rep. Jim Himes (D-CT), ensuring that US-based financial companies are placed on a level playing field with their international counterparts. H.R. 3283, the Swap Jurisdiction Certainty Act, clarifies a provision of the Dodd-Frank Act to ensure U.S. financial institutions that conduct international business transactions can do so with foreign entities in the same manner as their non-U.S.competitors.

Dodd-Frank established a regulatory regime that brings enhanced transparency to the derivatives market. According to Chairman Garrett, the manner in which some U.S. regulators are interpreting certain provisions of Title VII, however, could greatly, and inappropriately, expand the international scope of U.S. regulations. Without clarifying the extraterritorial reach of Dodd-Frank, uncertainty will reign and U.S. financial institutions would be disadvantaged.

The legislation permits non-U.S. companies that are registered as swap dealers to follow the capital rules of their home jurisdiction, rather than that of the U.S., as long as the home jurisdiction has comparable requirements and the home jurisdiction is a Basel Signatory. The legislation also prevents the possible requirement that registered swap dealers must post separate margins for each government under which they are regulated.

The swaps market developed as a global market, with the focus of trading determined by the location of the counterparties and the underlying assets rather than regulatory requirements. As the United States works to coordinate international harmonization of derivatives regulation, noted Rep. Himes, US regulations must acknowledge that the U.S. is at least 12 to 18 months ahead of similar regulatory efforts in Europe and Asia.

Under the current regulatory proposals, a registered swap dealer could be subject to all U.S. regulations for all of its swaps, including swaps with non-U.S. persons. Thus far, the CFTC and SEC’s proposed rules have been drafted without limitation on their cross-border impact, said Rep. Himes. The lack of clarity on the extraterritorial impact of the proposed regulations makes it difficult for swaps participants to structure their global swaps business. This would mean that U.S. regulations would apply to all of the swaps activities of a registered swap dealer that is based outside of the United States, including swaps that are otherwise of an entirely non-U.S. nature. This could subject non-U.S. registered swap dealers to both U.S. requirements and their home country requirements.

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