CFTC Cuts Back Registration Requirements for Cross-Border Derivatives
By Jake Schanne, RBFL Student Editor
The Commodities Future Trading Commissions (CFTC) issued a Final Ruling on July 23, 2020 removing registration requirements for swap dealers and major swap participants. The Ruling replaced a 2013 Guidance that had technically been unenforceable, but was largely followed. The decision was issued 3-2 in a partisan split with Republican-appointed commissioners voting for and Democrat-appointed commissioners voting against.
The affirming commissioners argued that the majority of CFTC registration requirements were redundant of equivalent foreign regulations, particularly following a majority of G20 countries’ adoption of the Pittsburgh Accords. Further, they believed that the Ruling covered exceptions to any entity attempting to circumvent U.S. regulations by (1) requiring the foreign regulations to be comparable; (2) maintaining Dodd-Frank regulations on swap dealers and attendant dealers when the swap of a non-U.S. person is “guaranteed” by a U.S. person; (3) and creating a “significant risk subsidiary” (SRS) category that attempts to extend Dodd-Frank regulations on US affiliated-subsidiaries in foreign countries. Several U.S. financial institutions lauded the rule for eliminating redundant bureaucratic costs.
However, the two dissenting commissioners criticized the rule for increasing risk to the U.S. financial system with only minimal gain. They contended the Ruling left open several loopholes including (1) an overly narrow definition of “guaranteed” swaps requiring rights of recourse against grantors, and (2) three major exceptions that the SRS category would not cover: (i) foreign-affiliated subsidiaries that are small relative to the US parent company, (ii) foreign subsidiaries of a US parent company with global consolidated assets worth less than $50 billion, and (iii) subsidiaries that are prudentially regulated by the Federal Reserve or foreign regulations in line with the Basel Committee’s capital standards and has comparable margin requirements for uncleared swaps. These exceptions limit the SRS category, by the affirming commissioners’ own admission, to capture “few, if any” entities. U.S. entities can even try to create two of their own foreign subsidiaries not captured by the SRS category, like being small in size relative to their parent, and conduct swaps between the two subsidiaries without any U.S. regulations being imposed, despite both entities using U.S. money and keeping all the financial risk in the U.S.
Aside from policy considerations, the Ruling was furthered justified on legal principles of international comity and the written intention of Congress by passing Section 2(i) of the Commodity Exchange Act (CEA). Many commentators suggest that the Commission misinterpreted principles of international comity that bar certain U.S. regulations on foreign entities only if the respective foreign regulations are expressly incompatible with the US regulations. However, many commentators agreed with the CFTC’s interpretation of Section 2(i) of the CEA given the law’s recommendation for the CFTC to limit its regulations over foreign swaps. Critics rebut the CEA’s purpose was not only for increased prudence, but also to impose market regulations onto swap traders which the Final Ruling lacks.
Overall, the Final Ruling represents a controversial rollback of U.S. regulations and exchanges increased U.S. financial risk for reduced bureaucratic costs on international financial institutions.
Sources:
Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45292 (July 26, 2013).
Patrick Pearson, Comments of the European Commission in respect of CFTC Staff Advisory No. 13-69 regarding the applicability of certain CFTC regulations to the activity in the United States of swap dealers and major swap participants established in jurisdictions other than the United States (Mar. 10, 2014), https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59781&SearchText=.
EvangelosBenos et al., Centralized trading, transparency and interest rate swap market liquidity: evidence from the implementation of the Dodd-Frank Act (Bank of Eng. Staff Working Paper No. 580 May 2018), https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/centralized-trading-transparency-and-interest-rate-swap-market-liquidity-update.
Heath P. Tarbert, Statement of Chairman Heath P. Tarbert in Support of Final Cross-Border Swap Rule (July 23, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement072320b?utm_source=govdelivery.
Heath P. Tarbert, Statement of Chairman Heath P. Tarbert in Support of Final Swap Dealer Capital Rule(July 22, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement072220?utm_source=govdelivery
Dan M. Berkovitz, Dissenting Statement of Commissioner Dan M. Berkovtiz on the Final Rule for Cross-Border Swap Activity of Swap Dealers and Major Swap Participants(July 23, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement072320?utm_source=govdelivery
Press Release, “CFTC Approves Final Cross-Border Swaps Rule and an Exempt SEF Amendment Order at July 23 Open Meeting,” CFTC (July 23, 2020), https://www.cftc.gov/PressRoom/PressReleases/8211-20.
Joseph Vebman et al., CFTC Finalizes Cross-Border Swaps Rule (August 12, 2020), https://www.skadden.com/insights/publications/2020/08/cftc-finalizes-cross-border-swaps-rule.
Commodity Futures Trading Comm’n, Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants (to be codified at 17 C.F.R. pt. 23).
Minn-Chem, Inc. v. Agraium, Inc, 683 F.3d 845, 858(7th Cir. 2012) (holding that for US antitrust laws to apply to a foreign potash cartel, the cartel must have intended to produce and actually have produced a substantial effect in the United States because it contained the word “foreseeable”).
Hartford Fire Ins. Co. v. California, 509 U.S. 764, 796 (1993) (holding that for US anti-trust laws to apply to foreign companies the companies have a direct enough relationship with the US and meet threshold effects).
Hartford Fire, 509 U.S. at 798-99 (holding that conflicts of international comity only arise where a person subject to regulation by both states cannot comply with both jurisdiction’s laws).
Republic of Arg. v. Weltover, Inc., 504 U.S. 607, 619-20 (1992) (interpreting a U.S. statute to not require intent of substantial effect as the word “foreseeable” was not included in the statute nor implied by the words “direct”).
7 U.S.C § 2(i)
7 U.S.C § 15(a)
Dodd-Frank Act of 2010, H.R. 4173, 111th Cong. § 722(a) (mandating the CFTC to “consult and coordinate” with the SEC before enacting any “order regarding swaps” for “consistency and comparability, to the extent possible”)
Dodd-Frank Act of 2010, H.R. 4173, 111th Cong. § 762 (barring the SEC from rulemaking regarding swaps that is not empowered by the Dodd-Frank Act)
The Commodity Exchange Act & Regulations¸ Commodity Futures Trading Commission, https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.