Against the backdrop of heightened Congressional concern that regulations implementing the Dodd-Frank be globally consistent to avoid regulatory arbitrage, an SEC-CFTC roundtable on international issues relating to the implementation of the derivatives provisions of Dodd-Frank revealed a need for global harmonization. Section 722(d) of Dodd-Frank provides that Title VII does not apply to swap activities outside the US unless those activities have a direct and significant connection with activities in, or effect on, commerce of the United States or contravene any regulations adopted by the CFTC to prevent the evasion of the derivatives provisions of Dodd-Frank. Section 772 is a similar provision for SEC with respect to security-based swaps.
Ethiopis Tafara, Director of the SEC’s Office of International Affairs, noted that cross-border derivatives transactions present risks in the US because global risks can become domestic risks. In this regard, the proper approach is international regulatory collaboration, he said, since the large players in the derivatives markets are international and the customer-base is increasingly international, with many derivatives transactions being cross-border in nature. The global nature of the derivatives markets means that many foreign jurisdictions are drafting derivatives regulations. Dodd-Frank requires the SEC and CFTC to coordinate and consult with foreign regulators.
Robert Cook, Director of the SEC Trading and Markets Division said that the Commission recognizes the uncertainty around this area and how that impacts global financial institutions. He said that the SEC will address international issues holistically in a proposal that the agency is currently working on. The roundtable discussions will inform this proposal, he said.
The regulators asked if it would be useful to define US persons as used in Dodd-Frank. The panelists generally believe that any definition of US person in the Title VII context should be informed by existing law. Panelists mentioned SEC Regulation S as a blueprint for defining US person in Dodd-Frank. Regulation S has a definition of US person that includes any partnership or corporation organized or incorporated under US laws and excludes a branch of a U.S. person located outside the US if the branch operates for valid business reasons. Panelists recommended harmonizing the definition of US person both domestically and globally. Luke Zubrod of Chatham Financial noted that defining US person would add clarity for end users, adding that the mere guarantee by a US parent should not be the sole criteria for a subsidiary being a US person.
Director Tafara noted the difference between conflicting requirements and duplicative requirements. Conflicting requirements mean that you can’t comply with both requirements, he said, while duplicative requirements can be more costly to comply with. Panelists posited that consistency is important since duplicative requirements are not as bad as conflicting requirements. Wally Turbeville of Better Markets noted that some duplication is inevitable in the derivatives area.
Jonathan Short of ICE said that it is possible to become a derivatives clearing organization in one jurisdiction and have your primary regulator situated in your home jurisdiction. But things can get more complicated if you have other iterations to comply with. He noted that mutual recognition regimes or exemptions may be appropriate. Kim Taylor of CME: agreed on the possible need for mutual recognition regimes; and also noted that reciprocity is an important feature. Wally Turbeville of Better Markets emphasized that clearing is a central concept to the Dodd-Frank structure; and also said that the interconnectedness of clearing houses must be kept in mind.