Sunday, June 16, 2013

House Passes Bi-Partisan Legislation Requiring Congruent SEC-CFTC Regulations on Cross-Border Derivatives Transactions

The House of Representatives passed the Swap Jurisdiction Certainty Act (HR 1256) by a bi-partisan vote of 301-124, which would direct the SEC and CFTC to adopt joint regulations on the oversight of cross-border derivatives transactions. The legislation is sponsored by Rep. Scott Garrett (R-NJ), Chair of the House Capital Markets Subcommittee. Chairman Garrett noted that H.R. 1256 brings additional transparency and clarity to the swaps market to benefit both consumers and taxpayers. Specifically, the legislation would require the SEC and CFTC to have identical cross-border derivatives regulations; would require a formal regulation to be issued; and would authorize the SEC and CFTC to regulate swaps transactions between U.S. and foreign entities, if the regulators are concerned about the importation of systemic risk.

If U.S. regulators get the cross-border application of Dodd-Frank wrong, warned Chairman Garrett, the swaps trade could move permanently to foreign jurisdictions, and end-users could see the costs of the financial tools they need to compete in a global marketplace dramatically increase. The Swap Jurisdiction Certainty Act will ensure that domestic and global swaps regulations are coherent and complementary, and it offers a common-sense approach with broad bi-partisan support, added Rep. Mike Conaway (R-TX), Chair of the House Commodities and Risk Management Subcommittee.

Full Agriculture Committee Chair Frank Lucas (R-OK) has noted that H.R. 1256 would also provide that no guidance from the Commissions in this area would have the force of law. Rep. David Scott (D-GA) said that the legislation addresses issues around the extra-territorial application of the Dodd-Frank Act. Non-U.S. persons would not be subject to the Dodd-Frank Act if, as determined by the Commissions, they are subject to an equivalent derivatives regulatory regime in a G-20 country. Chairman Conaway has noted that the bill allows the SEC and CFTC to designate other jurisdictions outside f the G-20 as equivalent and thus eligible for the exemption.

Rep. Jeb Hensarling (R-TX), Chair of the full Financial Services Committee, noted that ultimately H.R. 1256 will do two important things. First, it will tell the SEC and CFTC that they need to issue one joint rule when it comes to U.S. end-users being able to access global markets. Not one suggestion and one rule or two different rules, but one rule. Second, H.R. 1256 creates, with regard to the nine largest markets, a presumption that their regimes are broadly equivalent to the U.S. and not immediately deny access. Now at any given time, said Chairman Hensarling, if the CFTC and SEC come to the conclusion that these regimes are not broadly equivalent, that somehow they present risks to the U.S. economy, with the stoke of a pen they can change that presumption.

House Report No. 113-103 to accompany H.R. 1256 noted that Title VII of the Dodd-Frank Act seeks to regulate the over-the-counter derivatives market in much the same way that equities and futures exchanges are regulated. Because the OTC market is global, Title VII raises questions about the extent to which U.S. regulations will apply to swap and security-based swap transactions that take place outside the U.S.

According to the House Report, Title VII's plain language makes clear that Congress intended it to apply outside the U.S. only in certain limited circumstances. Section 722 of Dodd-Frank directs that provisions relating to swaps will not apply to activities outside the U.S. unless those activities have a direct and significant connection with activities in, or effect on, commerce of the United States or contravene anti-evasion rules promulgated by the CFTC.

The House report states that the comments and actions of U.S. regulators indicate that they are considering regulations that would result in Title VII being applied more broadly than Congress intended. Further, the Dodd-Frank Act requires both the CFTC and the SEC to issue rules on the extraterritorial scope of Title VII, creating the possibility of two different, potentially conflicting, regulatory regimes. To ensure that one rule is issued to govern the extraterritorial application of Title VII of the Dodd-Frank Act and to ensure that the CFTC and SEC focus their resources and regulatory efforts on jurisdictions that are not broadly equivalent with the U.S. swaps regime, the House passed the Swap Jurisdiction Certainty Act.

H.R. 1256 harmonizes the cross-border approaches by requiring the CFTC and SEC to jointly issue the same rule related to the cross-border application of the Dodd-Frank Act within 270 days of the bill's enactment. This joint rule would have to be promulgated in accordance with the Administrative Procedures Act. H.R. 1256 ensures that operating entities in foreign countries or administrative regions with broadly equivalent regimes for swaps will not be subject to U.S. rules. Finally, H.R. 1256 requires that the SEC and CFTC jointly provide a report to Congress if they determine that a foreign regulatory regime is not broadly equivalent to United States swap requirements.

Obama Administration Position. The Obama Administration issued a Statement of Policy opposing the passage of H.R. 1256. The Administration believes regulators should be given the time necessary to complete their work. The Administration consequently opposes passage of H.R. 1256, which would preempt ongoing work and slow the implementation of these vital reforms.

The Administration said that the Dodd-Frank Act puts in place a number of requirements that bring transparency to and enhance the stability of derivatives markets. These reforms will collectively strengthen the weak and outdated regulatory regime that played a significant role in the crisis that caused devastating damage to the U.S. economy. As part of the significant progress the SEC and CFTC are making with a number of derivatives-related reforms, emphasized the Administration, the regulators are already coordinating to address the issues raised in H.R. 1256, while taking into account the characteristics of the particular markets they regulate. Given these ongoing coordination efforts, passage of the bill would be premature and disruptive to the current and ongoing implementation of the reforms.