In his final speech to the Futures Industry Association at the 12th Annual International Derivatives Expo (IDX) in London, Chairman Giancarlo recounted his previous efforts to streamline the CFTC’s cross-border swaps framework, what is happening now at the agency, as well as what we can expect in the future on this front.
In remarks titled Recalibrating the CFTC’s Cross-Border Regulation: Current Status and Next Steps, the chairman described three proposed rulemakings that are currently being considered by the Commission. He also shared his thoughts regarding comparability determinations for non-U.S. jurisdictions, as well as an approach to addressing cross-border issues relating to non-U.S. trading platforms.
First principles. Before discussing the details or substance of the anticipated proposed rulemakings, the chairman set forth first principles which inform his approach to cross-border regulation. These include:
Conceptually, the CFTC’s swaps authority “shall not apply” to activities outside the United States unless those activities “have a direct and significant connection with activities in, or effect on, commerce of the United States” set forth in the Dodd-Frank Act. Accordingly, determining what is “direct and significant” to the U.S. financial system should be at the heart of the CFTC’s approach to cross-border issues.
A distinction must be made between swaps reforms that are designed to mitigate systemic risk on one hand, and swaps reforms that address market and trading practices on the other. Systemic risk reforms include swaps clearing, margin for uncleared swaps, dealer capital, and recordkeeping and regulatory reporting, and these reforms seek to mitigate the type of risk that may have a “direct and significant” connection with the U.S. Reforms that are focused on market and trading practices in a foreign jurisdiction are not likely to have a “direct and significant” connection with the U.S.
The CFTC should act with deference to non-U.S. regulators in jurisdictions that have adopted comparable G20 swaps reforms. In doing so, the CFTC should seek stricter comparability for substituted compliance with requirements intended to address systemic risk and afford more flexible comparability for substituted compliance with requirements intended to address market and trading practices.
Current rulemaking initiatives. According to Chairman Giancarlo, CFTC staff has prepared three rulemakings that are now being considered by the full Commission. The chairman intends to call these proposals for a vote before he leaves the CFTC. The proposed rulemakings are as follows:
- DCO registration with alternative compliance. The first proposal addresses the registration of non-U.S. derivatives CCPs, commonly referred to as derivatives clearing organizations (DCOs). Under this proposal, a framework will be created under which non-U.S. DCOs that do not pose a substantial risk to the U.S. financial system would have the option of being fully registered with the CFTC as a DCO if they meet their registration requirements through compliance with their home country requirements.
- Exempt DCO. The second proposal contemplates giving non-U.S. DCOs that do not pose a substantial risk to the United States, and that are subject to “comparable, comprehensive supervision and regulation” by appropriate regulators in the DCO’s home jurisdiction, the option to be exempt DCOs under an enhanced framework. This option would permit exempt DCOs to offer customer clearing to U.S. eligible contract participants (i.e., other than U.S. retail customers) through foreign clearing members that are not registered as FCMs.
- Swap entity cross-border. The third rule proposal would address the registration and regulation of non-U.S. swap dealers and major swap participants, as well as foreign branches of U.S. banks. Specifically, the proposal addresses the cross-border application of the swap dealer and major swap participant registration thresholds. If adopted, the proposal would replace the related portions of the cross-border guidance issued by the CFTC in 2013, the cross-border rules proposed by the CFTC in 2016, and certain related staff no-action letters and guidance.
Comparability and substituted compliance. Chairman Giancarlo further noted that the rulemaking proposals are complemented by a series of comparability determinations that the CFTC has issued and plans to consider in the near future. He asserted that “A commitment to deference must be a fundamental component of the Commission’s cross-border framework.”
In this area, the chairman also pointed to the recent substituted compliance determination recently granted by the Commission to Australia with respect to margin requirements for uncleared swaps. The agency also amended a previous substituted compliance determination for Japan with respect to the uncleared margin requirements. Further, the CFTC granted substituted compliance for the EU with respect to the uncleared margin requirements. Giancarlo urged the agency to continue making additional comparability determinations wherever appropriate.
Approach to non-U.S. swaps trading venues. While the CFTC’s recent proposed amendments SEF rules did not address non-U.S. swaps trading venues, Chairman Giancarlo believes that the CFTC should be committed to trying to make comparability determinations for trading venues in all the major swaps jurisdictions. He noted that over 90 percent of global swaps activity takes place in these venues. He also observed that the CFTC already has exempted trading venues from registration as SEFs in the EU and Singapore, and a comparability assessment for trading venues in Japan is close to completion. In case of Brexit, the CFTC already announced the intention to extend the exemption from registration as SEFs to U.K. trading venues consistent with the CFTC’s arrangement with the EU.
Concluding words. The chairman concluded his remarks underscoring that the CFTC must remain a leader in global swaps reform. He observed, “With the proper balance of sound policy, regulatory oversight, outcomes-based regulatory deference and a little bit of courage, world derivatives markets will continue to evolve in responsible ways and continue to help grow the global economy, creating a future of untethered aspiration where creativity and economic expression is a social good in its own right, and a source of human growth and human advancement.” And with that, Chairman J. Christopher Giancarlo bid, “Farewell.”
In this area, the chairman also pointed to the recent substituted compliance determination recently granted by the Commission to Australia with respect to margin requirements for uncleared swaps. The agency also amended a previous substituted compliance determination for Japan with respect to the uncleared margin requirements. Further, the CFTC granted substituted compliance for the EU with respect to the uncleared margin requirements. Giancarlo urged the agency to continue making additional comparability determinations wherever appropriate.
Approach to non-U.S. swaps trading venues. While the CFTC’s recent proposed amendments SEF rules did not address non-U.S. swaps trading venues, Chairman Giancarlo believes that the CFTC should be committed to trying to make comparability determinations for trading venues in all the major swaps jurisdictions. He noted that over 90 percent of global swaps activity takes place in these venues. He also observed that the CFTC already has exempted trading venues from registration as SEFs in the EU and Singapore, and a comparability assessment for trading venues in Japan is close to completion. In case of Brexit, the CFTC already announced the intention to extend the exemption from registration as SEFs to U.K. trading venues consistent with the CFTC’s arrangement with the EU.
Concluding words. The chairman concluded his remarks underscoring that the CFTC must remain a leader in global swaps reform. He observed, “With the proper balance of sound policy, regulatory oversight, outcomes-based regulatory deference and a little bit of courage, world derivatives markets will continue to evolve in responsible ways and continue to help grow the global economy, creating a future of untethered aspiration where creativity and economic expression is a social good in its own right, and a source of human growth and human advancement.” And with that, Chairman J. Christopher Giancarlo bid, “Farewell.”