In
a letter to CFTC Chair Gary Gensler, the Bank of Japan and the Financial
Services Agency urged the CFTC to broaden the application of substituted compliance for OTC derivatives regulation so
that any overlap or conflict with Japanese derivatives regulations can be
avoided. They also asked the CFTC to clarify the procedure and implementation
timeline of substituted compliance and to respect foreign regulations as a
whole set and not on a piecemeal basis.
The letter was in response to the CFTC’s proposed
guidance on the cross-border application of the derivatives
provisions of the Dodd-Frank Act. The guidance introduces the concept of substituted
compliance under which, as recently explained by Chairman Gensler at Senate Ag
Committee hearings, 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.
While welcoming the use of the substituted compliance
concept, the FSA and the central bank of Japan said that, with regard to entity-level
regulations, substituted compliance should apply to all types of foreign
affiliates of US-based swap dealers, including those with swaps booked in the US. Substituted compliance should also be extended to
a broader set of transaction-level requirements. For example, transactions
conducted in Japan Japan
The CFTC proposes to make comparability determinations
on an individual requirement basis, such as mandatory clearing and trade
execution facility, rather than on the foreign
regulatory regime as a whole. The FSA and central bank believe that this
determination should be made on a country-by-country basis, and in a comprehensive
manner, from the viewpoint of whether or not foreign regulation is broadly in
alignment with US regulation and consistent with the overall objectives of the
G20 commitments. The determination should also take into account such elements
as further regulations to be introduced in a phased manner and the necessity of
different regulation in light of divergent practices in non-US markets.
Moreover, the FSA and central bank said that, when
requirements under Japanese regulations are not identical to those of the US
In addition, the Japanese regulators believe that CFTC
regulations, including swap dealer registration should, as a matter of
principle, not be applied to Japanese financial institutions established and conducting businesses in Japan
In this regard, according to the CFTC rule, the
application for registration as swap dealer will need to be filed within 60 days after the
final rule on the definition of swaps is published in the Federal Register. Although this
deadline is applied to non-US persons, as well as US persons, the FSA and central
bank requested that the swap dealer registration requirement should not apply
to non-US persons before the details, including the procedure and
implementation timeline of substituted compliance become clear, and the assessment by the Commission for substituted
compliance is completed and agreed with interested parties.
The FSA and central bank believe that only
transactions with US persons
conducted by Japanese financial institutions established in Japan US
persons conducted by entities under common control of Japanese financial
institutions established outside Japan ,
such as in the UK or Hong
Kong, should not be included in the calculation of swap transactions in regard
to the de minimis threshold, with respect to the Japanese financial institutions
established in Japan
As they understand the proposed guidance, Japanese
financial institutions established in Japan
do not need to include the notional value of swap transactions with US persons in which their US