House and Senate Reform Bills Deal With International Nature of Derivatives Regulation

Recognizing the international characteristics of OTC derivatives, both the Senate and House financial reform bills contain nearly identical provisions promoting the consistent global regulation of swaps and security-based swaps. Section 3003 of the House bill and Section 761 of the Senate bill direct the SEC and CFTC to consult and coordinate with foreign regulators on the establishment of consistent international standards with regard to the regulation of swaps and security-based swaps. In this spirit, the bills also authorize the SEC and CFTC to enter into information-sharing arrangements with foreign regulators with regard to the regulation of swaps and security-based swaps as they deem necessary for the protection of investors and swap counterparties, and as in the public interest.

Both bills also deal with foreign exchanges offering direct trading access to persons located in the US. Under Section 3115 of the House Wall Street Reform and Consumer Protection Act, a foreign exchange, regardless of the nature of the contracts it offers, cannot provide U.S. persons direct access to its electronic trading and order matching systems unless the foreign exchange complies with regulatory criteria imposed by the CFTC, including position limits and large trader reporting.

Thus, for example, a Brazilian exchange that wants to allow U.S. persons direct computer access to trade futures in Brazilian government debt would have to comply with the regulatory criteria imposed by the CFTC. Similarly, Section 3115 prohibits a foreign board of trade from providing direct access to persons in the US for contracts that settle against the price of futures contracts listed for trading in the US unless the foreign exchange adopts mandated U.S. position limits and other substantial U.S. regulatory requirements. For example, the foreign board of trade must agree to provide the CFTC with large trader positions and aggregate trader positions.

The Senate Restoring American Financial Stability Act similarly requires a foreign exchange providing US persons direct access to its electronic trading and order matching systems to comply with regulatory criteria imposed by the CFTC, including position limits and large trader positions. However, the Senate bill would also allow the CFTC, in its discretion, to require the foreign exchange to register with the Commission as a condition of it giving U.S. persons direct access to its electronic trading and order matching systems. The Senate bill also offers a definition of direct access as allowing a U.S.-located person to enter trades directly into the trade matching system of the foreign exchange.

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