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 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