The securities, banking and hedge fund industries have asked the CFTC to extend the public comment period on proposed guidance on the cross-border application of the Dodd-Frank derivatives provisions from August 27 until September 10. According to SIFMA, the American Bankers Association and the Managed Funds Association, the proposed guidance will have a significant impact on how the global derivatives markets will be regulated and will have broad repercussions on how banks, securities firms and hedge funds conduct their swaps business. The associations are working together to provide thoughtful and constructive comments to the Commission.
In addition, since the proposed guidance will have implications for a substantial number of other regulations, it will take time for interested parties to analyze the various regulatory inter-relationships and dependencies to provide comments that are as informed and well-considered as possible. Moreover, the guidance is likely attract substantial interest from constituencies outside the United States, noted the industry associations, and they should be afforded the opportunity to develop their comments in a thorough manner.
The proposed guidance also contains fundamental information concerning which entities will need to register as swap dealers or major swap participants under Title VII of Dodd-Frank. Thus, the industry groups urged the CFTC to delay the compliance date for registration as a swap dealer or major swap participant until a period of time after the Commission publishes its final cross-border interpretative guidance.
The CFTC guidance introduces the concept of substituted compliance under which, as recently explained by CFTC Chair Gary Gensler at a congressional 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.
The Commission believes that a cross border policy that allows for flexibility in the application of the Commodity Exchange Act, while ensuring the high level of regulation contemplated by the Dodd-Frank Act and avoiding potentially conflicting regulations, is consistent with principles of international comity. It would also advance the congressional directive in Section 752 of the Dodd-Frank Act that the Commission act in order to promote effective and consistent global regulation of swaps and coordinate with foreign regulators on the establishment of consistent international standards with respect to the regulation of swaps.
In addition, practical considerations underlie the substituted compliance doctrine. Namely, the limitations in the Commission’s supervisory resources and its ability to effectively oversee and enforce application of the Commodity Exchange Act to cross-border transactions and activities support the CFTC in applying its regulations in a manner that is focused on the primary objectives of the Act.