CFTC cross border rules leave much unresolved

The CFTC last week issued comparability determinations with Australia, Europe, Hong Kong, Japan, Canada and Switzerland. The agency has, “carefully reviewed each regulatory provision of the foreign jurisdictions submitted to us and compared the provision’s intended outcome to the Commission’s own regulatory objectives,” according to outgoing chairman, Gary Gensler.

The outcome of this careful review has not been to the pleasure of all market participants or regulators. Whilst equivalency, or substituted compliance, was accepted for bank record keeping and risk management standards, many areas have been left unresolved and none were deemed suitable to substitute U.S rules on the reporting of data to a trade repository or swap data repository.

This means that, as of March 2014, all foreign arms of U.S banks must report all of their OTC derivatives data to a U.S approved SDR. The reporting mandate has gone live in Japan and Australia, and will be live in Europe as of 12 February 2014. Hong Kong is very close to implementing its own reporting mandate, too.

Decisions over whether or not other trading measures are sufficiently robust in the eyes of the CFTC to replace the Dodd-Frank rules have been deferred, as have decisions pertaining to capital requirements and trading on exchange-like platforms such as the U.S swap execution facilities. This is because the final rules around these have not yet been finalised in the U.S or abroad.

Gensler also commented that there is scope for the CFTC to change its mind and outlook as regards foreign equivalency once all the rules are in place in other jurisdictions. “As things come into place, whether on the transaction side or on the clearing and data reporting side… those could be determinations by this commission in the future.”

As well as setting the CFTC on a potential collision course with foreign regulators, there was also a lone dissenting voice coming from the CFTC in the form of commissioner Scott O’Malia. “If the Commission’s objective for substituted compliance is to develop a narrow rule-by-rule approach that leaves unanswered major regulatory gaps between our regulatory framework and foreign jurisdictions, then I believe that the Commission has successfully achieved its goal today… the Guidance fails to articulate a valid statutory foundation for its overbroad scope and inconsistently applies the statute to different activities.”

Chairman Gensler will be vacating the role at the end of December (http://ds.thomasmurray.com/opinion/change-leadership-change-direction-cftc) and this is likely to be his final act. He aggressively pursued the implementation of market reform in the U.S to the extent that it has left the CFTC, in most instances, a long way ahead of other jurisdictions. There is a lawsuit against the CFTC from SIFMA and ISDA as regards the issue of cross border controls, something Gensler has been very keen to be very strict on.

He is of the disposition that the U.S should have as broad a regulatory outreach as possible, to best protect the U.S economy. There has been intense lobbying from the major U.S banks and foreign regulators against some of the CFTC’s rulings, so it remains to be seen how long the CFTC maintains its heavy-handed approach in the wake of Gensler’s departure. 

Tags: CFTCequivalencyDodd FrankTrade RepositoriesSwap Data Repositories