CFTC Chair J. Christopher Giancarlo offered recommendations for rethinking the agency's application of its swaps rules to cross-border activities. He said he intends to direct the CFTC staff to develop proposed rules governing the cross-border application of the CFTC swaps rules.

In a speech in London, Mr. Giancarlo highlighted problems with the current CFTC approach, offered a series of principles to guide the agency's assertion of authority over cross-border activities, and outlined a series of more specific recommendations.

Mr. Giancarlo described the current CFTC approach to cross-border regulation as "over-expansive, unduly complex, and operationally impracticable." He criticized this approach for (i) being set forth in "guidance" rather than rules, (ii) taking an overly broad view of what constitutes a "direct and significant connection" with U.S. commerce, (iii) being "conceptually inconsistent" in looking at "U.S. entities" for activities abroad and "territorial" in looking at activities in the United States, (iv) taking a "somewhat arbitrary" approach to substituted compliance determinations, and (v) failing to distinguish between rules that address systemic risk and those that address markets and trading matters.

In developing proposed rules, Mr. Giancarlo said the CFTC should:

  • recognize the distinction between swaps reforms intended to alleviate cross-border systemic risk and reforms designed to address specific trading practices that are suitable for tailoring to jurisdictional trading conditions;
  • pursue multilateralism with respect to swaps rules that mitigate systemic risk;
  • be a rule maker in overseeing U.S. markets and act with deference towards non-U.S. markets; and
  • act to encourage the adoption of comparable swaps reform regulation in non-U.S. markets that have not adopted swaps reform for any significant swaps trading activity.

Mr. Giancarlo offered a preview of a forthcoming white paper that will contain policy recommendations, which will include:

  • expanding the use of the CFTC's exemption authority for non-U.S. central counterparties ("CCPs") that clear swaps but do not pose any risk to the U.S. financial system if a CCP is subject to "comparable, comprehensive supervision and regulation" in its home country;
  • exempting non-U.S. trading venues subject to comparable regulation from registration as swap execution facilities; and
  • excluding, from the de minimis determination for swap dealer registration, swaps entered into by non-U.S. persons with (i) non-U.S. persons that are registered swap dealers and (ii) non-U.S. consolidated subsidiaries of U.S. entities.

Commentary / ">Nihal Patel

A reexamination of the CFTC's ill-conceived approach to cross-border swap regulation has been a long time coming. Chairman Giancarlo's direct criticism of the existing CFTC cross-border guidance is another step in a process that seems to have begun nearly two years ago.

Mr. Giancarlo's speech displays a significant amount of thinking about the existing CFTC policy and reasonable ways to make it better in light of the past five years' experience. It is also a humble reflection on the difficult balancing act in setting policies that adequately follow statutory mandates and protect U.S. markets and participants while deferring to competent foreign regulators and the market participants they oversee.

The details will be important here. Not just in the white paper that Mr. Giancarlo intends to publish, but also in the rules that the CFTC staff offers up for comment. The existing CFTC cross-border regime is a frustrating patchwork beginning with the lengthy and complicated cross-border guidance and followed up by a series of substituted compliance determinations, staff guidance and letters, and a handful of rules. It will not be easy for the CFTC to come up with a new framework that both works as general policy and provides certainty to market participants in determining how to structure businesses.

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