The US Commodity Futures Trading Commission passed its first binding rule on cross-border registration requirements for swap market participants on July 23, extending deference to entities already under prudential regulation in foreign jurisdictions. The rulemaking also harmonizes some definitions with those used by the US Securities and Exchange Commission, and in conjunction with the action the agency clarified previous guidance and no-action relief.
The agency also advanced an amendment exempting certain trading venues in Europe from a requirement to register with the CFTC as swap execution facilities (SEFs) as a result of Brexit.
Final Rule: Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants
The final rule on registration requirements for swap market participants codified previous no-action relief and existing CFTC guidance from 2013. It also formally harmonized the CFTC's definition of "US persons" and some accounting terms such as "guarantees" with those used by the Securities and Exchange Commission after a consultation with that agency.
Chairman Heath Tarbert characterized the rule as a flexible, outcomes-based approach that avoids duplicative regulation and provides much-needed certainty to market participants. He added that it should not be the CFTC's mission to be the "world's police" on swaps or any other asset, and that the final rule "properly balances protection of our national interests with appropriate deference to our international counterparts."
Commissioners Rostin Behnam and Dan Berkovitz, both Democrats, voted against the final rulemaking. Behnam warned against "a decision to jettison a cross-border regime that has not proven unreasonable, inflexible, or ineffective" and instead opt for broad deference to foreign regulators "at the expense of developing sound regulation." For his part, Berkovitz spent an extensive period of time questioning the Division of Swap Dealer and Intermediary Oversight on specific details of the final rule that, in his mind, may allow for multinational market participants to potentially move their swap activity overseas to evade CFTC oversight.
Commissioners Brian Quintenz and Dawn Stump, both Republicans, joined Tarbert in voting in favor of the rulemaking. Quintenz noted that other supervisors both at home and abroad would have sufficient oversight over swaps activity even in the unlikely circumstance of an entity attempting to avoid CFTC regulation. Stump expressed her support of the measure as a way to provide clarity for market participants relying on existing guidance and no-action letters, "rather than start from scratch." She added she "emphatically rejects the notion that deference to international regulatory authorities weakens oversight or protection of our markets."
Quintenz also took issue with accusations that both the capital requirements for swap participants finalized on July 22 and the cross-border regulation passed July 23 were "deregulatory" simply because they defer to the oversight of others or that preliminary proposals were more stringent. Under that logic, Quintenz said, any rulemaking could be labeled as deregulatory simply because "the most absurd and punitive proposal" was put forth first. Such a view "doesn't hold up to rational thought" and is a product of "unsubstantiated political labels" rather than an honest policy debate, he said.
In conjunction with the rulemaking, the CFTC withdrew a staff advisory and no-action relief regarding certain cross-border situations and issued new no-action relief.
Amendment Order: Exempting Certain Multilateral Trading Facilities and Organized Trading Facilities Authorized Within the European Union from the Requirement to Register with the Commodity Futures Trading Commission as Swap Execution Facilities
In other business, the CFTC commissioners voted unanimously 5-0 to exempt 16 entities in the European Union from requirements to register with the CFTC as SEFs, based on comparable supervision and regulation in their home countries.
Chairman Tarbert noted that the amendment order was born out of "continued signs that the European Commission and the European Markets Authority are working in good faith to build deference into their own interpretations" and hopes that the principle of deference will continue to be reciprocated by the CFTC's overseas counterparts.
Statements and additional documents
- Cross Border