CFTC Chair J. Christopher Giancarlo outlined several principles to guide effective cross-border regulation and provided an update on the status of CFTC cross-border rulemaking.
In a speech at the FIA 12th Annual International Derivatives Expo, Mr. Giancarlo stated that his approach to cross-border regulation is guided by three principles:
1. The CFTC has no jurisdiction outside the United States unless activity has a "direct and significant" connection to the U.S. financial system.
2. The CFTC should distinguish between swaps requirements designed to mitigate systemic risk and those that address market and trading practices.
3. The CFTC should defer to non-U.S. regulators that have adopted comparable G20 swaps reforms.
Mr. Giancarlo expressed support for several actions currently being considered by the CFTC including the adoption of "objective criteria" to determine whether a non-U.S. clearing counterparty poses "substantial risk to the U.S. financial system." Specifically, the proposal would employ two "20-percent tests," which would focus on (i) the percentage of initial margin owned by U.S.-domiciled holding companies at a non-U.S. derivative clearing organization ("DCO") and (ii) the percentage of the non-U.S. DCO's business in the overall U.S. cleared swaps market.
Mr. Giancarlo described three cross-border rulemaking initiatives:
- DCO Registration. The CFTC is considering a proposal to allow non-U.S. DCOs that do not pose a substantial risk to the U.S. financial system to register with the CFTC as DCOs, but enable them to meet requirements through substituted compliance with home-country requirements. Mr. Giancarlo indicated that "objective criteria" would be used for determining which non-U.S. DCOs posed a "substantial risk."
- Exempt DCO Proposal. The CFTC is considering whether to provide that a non-U.S. DCO that does not pose a "substantial risk" and is subject to comparable home-country regulation could have the option to be an "exempt DCO" under an alternative framework, including the ability to offer clearing to non-retail U.S. customers through non-U.S. clearing members.
- Swap Entity Proposal. The CFTC is considering a proposal to replace the cross-border guidance as to (i) the registration thresholds for swap dealers and major swap participants and (ii) the application of compliance with swap regulatory requirements by those entities in a cross-border context. Mr. Giancarlo indicated that the proposal would address, among other things, "arranged, negotiated or executed" ("ANE") transactions, and that it would not restrict the ability of U.S.-related entities to access foreign markets or "unnecessarily limit" the ability of non-U.S. persons to use U.S. personnel in an "incidental manner" to support non-U.S. swap activity.
Mr. Giancarlo also discussed swap execution facilities. Mr. Giancarlo urged the CFTC to take a "more risk-based approach" to non-U.S. trading venues registration, stating that these venues "do not pose [a] significant risk to the United States." In particular, he advocated that the CFTC should make comparability determinations for trading venues in all "major" jurisdictions where over 90 percent of swaps activity takes place, while taking a more "risk-based" approach to venues in the remaining jurisdictions.
Commentary / Nihal Patel
Mr. Giancarlo's comments continue to build on principles he first outlined in a cross-border white paper and in a series of other speeches and writings. From what Mr. Giancarlo laid out, the CFTC has a lot of work to do, and the details will be very important. On the DCO front, Mr. Giancarlo's suggestions make sense in that the CFTC would look to take a risk-based approach while permitting U.S. institutional investors the flexibility to trade overseas. On the swap dealer front, Mr. Giancarlo was more short on details, but based on his principles, it seems that the CFTC may deviate from the cross-border guidance to provide a more risk-based approach. One detail that Mr. Giancarlo did not mention, but that market participants will watch closely, is how similar the CFTC rules will be to the rules adopted by the SEC (including as to ANE transactions).
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