Thursday, December 13, 2012

House Panel Examines SEC-CFTC Harmonization of Dodd-Frank Derivatives Regulations Both Globally and Domestically

 A House panel pressed CFTC Chair Gary Gensler and SEC Director of Trading and Markets Robert Cook on the harmonization of regulations implementing the derivatives provisions of the Dodd-Frank Act both domestically and globally. Members of the House Capital Markets Subcommittee expressed concern that, with regard to cross-border derivatives transactions, the CFTC issued guidance centered on the doctrine of substituted compliance, while the SEC will conduct formal rulemaking

The CFTC guidance introduces the concept of substituted compliance under which 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.

Chairman Gensler said that the CFTC is committed to the doctrine of substituted compliance and will engage with foreign regulators to make the concept work. Director Cook noted that the SEC has not yet issued proposed derivatives cross-border regulations, but such is at the top of the Commission’s agenda. He pledged that the SEC will do a formal rulemaking with an attendant full cost-benefit analysis on cross-border derivatives transactions. Given the global nature of the derivatives market, the SEC will take a holistic approach on cross-border regulations.


The regulations will strike a balance between domestic priorities and the reality of the global nature of the derivatives market. In any event,  the new Title VII regime will present challenges in its implementation phase, and in overseeing and enforcing the new regime because of the wide range of new market participants and transactions

The SEC expects that the scope of the cross-border regulations will be broad. They will address the application of Title VII in the cross-border context with respect to each of the major registration categories covered by Title VII for security-based swaps and swap dealers; major security-based swap participants; security-based swap clearing agencies; and security-based swap data repositories and swap execution facilities. The regulations will address the application of Title VII in connection with reporting and dissemination, clearing, and trade execution, as well as the sharing of information with regulators and related preservation of confidentiality with respect to data collected and maintained by security-based swap data repositories.

Rep. David Schweikert (R-AZ) asked if the SEC and CFTC have harmonized their regulations implementing Title VII. Chairman Gensler replied that the SEC and CFTC issued jointly harmonized definitions and that the Commissions are coordinating on other regulations. Mr. Cook testified that the SEC is committed to consulting with the CFTC and other regulators at home and abroad in an effort to foster the development of common frameworks and to help ensure a level playing field for market participants consistent with the requirements of the Dodd-Frank Act. He also said that SEC has engaged in extensive interagency discussions concerning rules to implement Title VII that are not required to be adopted jointly. Although the timing and sequencing of the CFTC’s and SEC’s proposal and adoption of these rules have varied, he assured Congress that the objective of consistent and comparable requirements continues to guide the Commission’s efforts

Rep. Schweikert said that he was comfortable with the SEC conducting a formal rulemaking with regard to cross-border derivatives, but was concerned about the CFTC issuing guidance instead of regulations.

Noting that the CFTC is committed to substituted compliance, Rep. Spencer Bachus (R-AL), Chair of the full Financial Services Committee, said that market participants have grave concerns about substituted compliance and foreign regulators do not seem to agree with substituted compliance. He queried if any foreign regulators have endorsed the CFTC’s approach. Chairman Gensler responded that market participants requested substitute compliance and the Commission embraced what the  market participants wanted. Further, he noted that the CFTC engaged in extensive consultation with international regulators and continues to work with them on cross-border issues.

Chairman Bachus observed that the CFTC guidance may be in conflict with foreign regulations. Chairman Gensler acknowledged that there is a conflict with Japanese regulators over clearing. The CFTC is working with the Japanese regulators to provide relief so that US firms can use Japanese clearinghouses even if they are not registered in the US. He emphasized that the CFTC is committed to sorting out conflicts with foreign regulators in a practical way.

He also noted that the CFTC has received excellent cooperation from EU regulators on substituted compliance. The EU authorities have concerns around substituted compliance, but the CFTC and the EU regulators are working through these concerns, said Chairman Gensler.  Mr. Cook noted that the SEC is engaged with the CFTC and with foreign regulators, adding that many jurisdictions are at the cusp of implementing their G-20 commitment to erect a derivatives regulatory regime. The EU talks of mutual recognition and the CFTC speaks of  substituted compliance, he noted


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