There is a growing congressional concern in both the House and Senate Agriculture Committees over the CFTC’s use of interpretative guidance on the cross-border application of the derivatives provisions of the Dodd-Frank Act, while the SEC has indicated that it will issue regulations on the extraterritorial reach of Title VII after a rigorous economic and cost-benefit analysis. The CFTC guidance introduces the concept of substituted compliance under which, as recently explained by CFTC Chair Gary Gensler at the Senate Ag Committee hearing, the CFTC would defer to comparable and comprehensive foreign regulations. The CFTC proposes to permit a non-U.S. swap dealer or non-U.S. major swap participant, once registered with the Commission, to comply with a substituted compliance regime under certain circumstances. Substituted compliance means that a non-U.S. swap dealer or non-U.S. major swap participant is permitted to conduct business by complying with its home regulations, without additional requirements under the Commodity Exchange Act.
During today’s House Ag Committee hearing, Rep. Mike Conaway (R-TX), Chair of the Commodities and Risk Management Subcommittee, was concerned that the use of guidance by the CFTC obviated the conducting of a cost-benefit analysis and a also presaged a lack of coordination with the SEC, which intends to adopt regulations on the cross-border application of Dodd-Frank. Rep. Conaway said that Congress wants regulations that work for everyone. He asked CFTC Chair Gensler if the SEC will come to similar conclusions as the CFTC guidance when the SEC adopts its regulations on cross-border application of Title VII. The SEC regulations will be similar, but not identical to the guidance, said Chairman Gensler, adding that the guidance was issued under Section 722(d) of Dodd-Frank and there is no analogous provision on the SEC side.
Chairman Gensler noted that Section 722(d) states that swaps reforms must not apply to activities outside the
Chairman Conaway said that Congress believes that other provisions in Section 722 of Dodd-Frank give the SEC analogous authority to the CFTC authority in Section 722(d). He asked Chairman Gensler if that is the CFTC’s understanding, and the CFTC Chair noted that Section 722 is housed in the regulation of swaps markets part of Title VII, and that the CFTC would look into the issue.
Rep. Larry Kissell (D-NC) said that people want certainty with regard to the cross-border application of the derivatives provisions of Dodd-Frank and urged coordination with the SEC so that the CFTC does not get too far ahead of the SEC. Chairman Gensler noted that any timing gap with the SEC would raise concerns in the clearing of credit default swaps.
Chairman Gensler referenced a comment letter on the guidance from the Swiss Financial Market Supervisory Authority (FINMA) expressing concern about the potential extraterritorial effects of registration rules for swap dealers. Despite the issuance of the proposed guidance, FINMA was not in a position to fully assess the consequences of CFTC registration and whether these can be reconciled with Swiss law and regulations. Indeed, FINMA seriously doubts if CFTC registration as a swaps dealer by a Swiss bank can be reconciled with Swiss practice.
In particular, proposed reporting requirements on trade data and end-customer data, as well as access requirements, may raise Swiss privacy and data protection issues, along with enforcement difficulties. Due to these concerns, FINMA cautioned that it may have to deny financial institutions permission to supply certain information or grant direct access to US regulators. However, FINMA ended in a hopeful note that viable alternatives can be found to allow compliance with both CFTC and FINMA prudential mandates, one possible alternative being the provisional registration of foreign branches of Swiss banks in which swap transactions with US persons are booked until a separate entity is set up or the registration of a US incorporated entity acting as information transfer agent for the bank.
Chairman Gensler said that he has been in discussion with FINMA officials on the concerns raised in the letter. He noted that the impact of the proposed guidance on Swiss secrecy laws is a main concern of FINMA.
Former CFTC Acting Chair Walter Lukken, currently CEO of the Futures Industry Association, noted that the proposed CFTC guidance is not a regulation under the Administrative Procedure Act and thus does not require the CFTC to conduct a cost-benefit analysis before finalizing the guidance.
Moreover, in the view of the former official, the CFTC has proposed a broad interpretation of the definition of a