Sunday, March 16, 2014

Securities Group Comments on CFTC Cross-Border Guidance

The ABA Securities Association urged the CFTC not to adopt the U.S. personnel test for non-U.S. swap dealers contemplated by the Commission staff’s cross-border derivatives guidance and to re-consider the U.S. personnel test applicable to foreign Branches under the guidance. The CFTC staff guidance would apply to U.S. transaction-level requirements to a non-U.S. swap dealer regularly using personnel or agents located in the U.S. to arrange, negotiate, or execute a swap with a non-U.S. person. Similarly, there are issues raised by a related U.S. personnel test for determining whether, in conjunction with other factors, a swap is executed with the foreign branch of a U.S. swap dealer (requirement that, in order for a swap to be considered one that is with the foreign branch of a U.S. bank for purposes of the Cross-Border Guidance, the employees negotiating and agreeing to the terms of the swap (or, if the swap is executed electronically, managing the execution of the swap), other than employees with functions that are solely clerical or ministerial, must be located in the foreign branch or in another foreign branch of the U.S. bank.

In the view of the Securities Association, applying Title VII of the Dodd-Frank Act to non-U.S. swap dealers or foreign branches on the basis of the conduct of U.S.-based personnel will not in any way help advance the Dodd-Frank Act’s objective of mitigating systemic risk or increasing market transparency. Instead, the staff interpretation will impose unnecessary compliance burdens on swap market participants, encourage them to relocate jobs and activities outside the United States to accommodate non-U.S. client demands, and fragment market liquidity.

The securities group urged the CFTC to avoid competitive disparities between different categories of swap dealers by applying analogous treatment of the conduct of U.S. personnel to non-U.S. swap dealers (whether or not a guaranteed affiliate or an affiliate conduit) on the one hand, and foreign branches, on the other hand. In other words, identical U.S. personnel activity conducted by two different firms operating in the U.S. should be subject to the same U.S. personnel conduct rules. Such differences have and will continue to result in inappropriate competitive disparities that are inconsistent with the Commission’s objective of establishing a legal framework that furthers the public interest.