Chairman Giancarlo aims to get global swaps regulation ‘right’ with issuance of comprehensive white paper

By Brad Rosen, J.D.

Citing the risks of fragmenting global swaps markets and their increasing lack of resilience in the event of market shocks, CFTC Chairman J. Christopher Giancarlo released his long awaited white paper titled Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation. The Chairman asserted that given the global nature of the swaps market, where cross-border transactions are the norm rather than the exception, “it is imperative that the CFTC gets the cross-border application of its swap rules right.”

According to the agency’s release accompanying the white paper, Chairman Giancarlo intends to direct the CFTC staff to put forth new rule proposals based on the principles set forth in this white paper, to address a range of cross-border issues in swaps reform.

Adverse consequences flowing from the CFTC’s current approach. In the white paper, the chairman identifies a number of adverse consequences resulting from the CFTC’s current cross-border approach. According to Giancarlo, the current approach is flawed based upon some of the following reasons:

• It is over-expansive, unduly complex, and operationally impractical, increasing transaction costs and reducing economic growth and opportunity.
• It relies on a substituted compliance regime that encourages a somewhat arbitrary, rule-by-rule comparison of CFTC and non-U.S. rules under which a transaction or entity may be subject to a patchwork of CFTC and non-U.S. regulations.
• It shows insufficient deference to non-U.S. regulators that have adopted comparable G20 swaps reforms and is inconsistent with the CFTC’s longstanding approach of showing comity to competent non-U.S. regulators in the regulation of futures.
• It is expressed in “guidance” rather than formal regulation subject to the Administrative Procedure Act.

Recommendations for improvement. Giancarlo put forth several recommendations in the white paper calculated to improve the Commission’s cross-border approach, which he notes are supportive of the G20 swaps reforms, aligned with Congressional intent, and better balance systemic risk mitigation with healthy swaps market activity in support of broad-based economic growth. Among other things, the chairman recommended the following changes to the CFTC’s present cross-border approach:

• Non-U.S. CCPs—Expand the use of the CFTC’s exemptive authority for non-U.S. Central Clearing Parties (CCPs) that are subject to comparable regulation in their home countries and do not pose substantial risk to the U.S. financial system, permitting them to provide clearing services to U.S. customers indirectly through non-U.S. clearing members that are not registered with the CFTC.
• Non-U.S. Trading Venues—End the current bifurcation of the global swaps markets into separate U.S. person and non-U.S. person marketplaces by exempting non-U.S. trading venues in regulatory jurisdictions that have adopted comparable G20 swaps reforms from having to register with the CFTC as swap execution facilities.
• Non-U.S. Swap Dealers—Require registration of non-U.S. swap dealers whose swap dealing activity poses a “direct and significant” risk to the U.S. financial system; take into account situations where the risk to the U.S. financial system is otherwise addressed, such as swap transactions with registered swap dealers that are conducted outside the United States. Moreover, show appropriate deference to non-U.S. regulatory regimes that have comparable requirements for entities engaged in swap dealing activity.
• Clearing and Trade Execution Requirements—Adopt an approach that permits non-U.S. persons to rely on substituted compliance with respect to the swap clearing and trade execution requirements in comparable jurisdictions, and that applies those requirements in non-comparable jurisdictions if they have a “direct and significant” effect on the United States. 

The chairman reaffirms his support for the Dodd-Frank market reforms. Like he has done many times in the past, Chairman Giancarlo again affirmed his support for the post-financial crisis Dodd-Frank reforms, stating, “I have been a constant supporter of the swaps market reforms passed by the U.S. Congress in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the commitments made by the G20 leaders in Pittsburgh in 2009.” He continued, “Those are clearing standardized swaps through central counterparties, reporting swaps to trade repositories, and trading standardized swaps on regulated trading platforms. However, I have long said that I hold reservations about the CFTC’s current approach to applying its swaps rules to cross-border activities.”

Next steps. The CFTC’s release indicated that the proposals contained in the white paper will be presented to the full CFTC for its input, bipartisan consideration, and adoption. Any subsequent rulemakings would replace the cross-border guidance issued by the CFTC in 2013 and the cross-border rules proposed by the CFTC in 2016, and would address certain positions taken in CFTC staff advisories and no-action letters as well.