Yesterday, the Global Markets Advisory Committee of the Commodity Futures Trading Commission (“CFTC”) held an open meeting to address four topics:

  • the European Commission’s proposal for OTC derivatives and Japanese legislation on clearing;
  • IOSCO;
  • Dodd-Frank rulemaking; and
  • Foreign Board of Trade registration rulemaking.

European Commission’s Proposal for OTC Derivatives and Japanese Legislation on Clearing

In his opening remarks before the first panel, Commissioner Dunn noted that the United States cannot stand alone in its efforts to bring transparency to the over-the-counter (OTC) derivatives markets, stating that the United States “must tackle issues hand in hand with our sister regulators.” Patrick Pearson, Head of the Financial Markets Infrastructure Unit of the European Commission’s Internal Market Directorate General, concurred with Commissioner Dunn during his presentation on the European Commission’s recent legislative proposals aimed at regulating dealers and the clearing of standardized derivatives. He also described two additional regulatory measures on that are on the horizon, which are aimed at regulating the trading of standardized swaps and increasing requirements for banks relating to un-cleared trades. Mr. Pearson made clear that “one thing we cannot afford is a different regulatory outcome” between nations, urging regulators to look at the product of their regulation and not the process to ensure that global regulation is harmonized. Mr. Pearson enumerated the similarities between the European Commission’s legislation and the Dodd-Frank Act, including regulation of dealers, mandatory central clearing requirements, and the process and framework set up for clearing OTC derivatives, as well as key differences, including the level of detail of the regulations regarding central counterparties and the European Commission’s exemption of trades between two corporations from reporting requirements. Mr. Pearson remarked that overall the legislation passed by the European Commission and the United States are very similar in scope, application and requirements, noting that while there are differences, none are significant. Mr. Pearson concluded by expressing his view that there is a “need for convergence, not competition, in regulation.”

Mr. Chikahisa Sumi, Deputy Commissioner for Internal Affairs and Competitiveness of the Japanese Financial Supervisory Agency (“FSA”), followed Mr. Pearson’s presentation by describing the recent legislation passed in Japan. Mr. Sumi began by noting that while Japan is striving to contribute to global financial stability, it has not yet passed legislation that is as sweeping or detailed as the legislation passed by the European Commission and the United States. To date, Japan has passed amendments to its laws that stipulate the broad changes it desires to bring about. The next step of the process involves the issuance of cabinet office ordinances which will set forth the specific details of how such changes will be implemented. Therefore, while laws have been passed, much work still needs to be done in process of formulating ordinances. The FSA is seeking comment from industry participants and other regulators in an effort to make the cabinet office ordinances compatible with worldwide regulatory reforms.

IOSCO

Jacqueline Mesa, Director of the CFTC’s Office of International Affairs, provided an overview of the IOSCO Technical Committee’s new task force on OTC derivatives, which is designed to serve as a meeting point for regulators to coordinate their rulemaking efforts. Ms. Mesa detailed the efforts being undertaken by the task force, which include rulemaking efforts relating to data reporting and aggregation requirements, including the formulation of consistent international standards relating thereto, and ongoing projects focused on the suitability of complex products, a comparison of capital requirements worldwide, the role of regulators in identifying risk in the markets and mandates on high frequency trading. Ms. Mesa noted that the task force will be taking a phased approach to releasing its reports in an effort to get reports out more quickly.

Dodd-Frank Rulemaking

Dan Berkovitz, CFTC General Counsel, provided an update of the rulemaking efforts underway at the CFTC following the passage of the Dodd-Frank Act. Mr. Berkovitz noted that there are currently thirty different rulemakings underway at the CFTC, many of which involve the extraterritorial implications of the Dodd-Frank Act. Major topics being addressed in the rulemaking process include clearing requirements, commercial end-user exceptions thereto, and access by regulators to swap data repositories located in foreign jurisdictions.

Foreign Board of Trade Registration Rulemaking

David Van Wagner, Chief Counsel, CFTC Division of Market Oversight, and Duane Andresen, Senior Special Counsel, CFTC Division of Market Oversight, detailed the Dodd-Frank Act’s new registration provisions for foreign boards of trades (FBOTs). Mr. Andresen set forth the factors the CFTC would consider in reviewing an FBOT’s application for registration, including:

  • membership criteria;
  • trading system;
  •  terms and conditions of contracts;
  •  settlement and clearing;
  •  the regulatory regime;
  •  rule enforcement; and
  •  information sharing.

Mr. Andresen also discussed three considerations before the CFTC in relation to FBOTs:

  • whether the registration requirement will replace the current practice of issuing no-action relief letters and what standard the CFTC should use to determine if an FBOT should be eligible for registration;
  • what should constitute comparable, comprehensive supervision and regulation by appropriate government authorities in the FBOT’s home country and how registration requirements should affect FBOTs that currently have no-action relief; and
  • whether the Dodd-Frank Act’s definition of “direct access” should be expanded for registration purposes to include additional order routing methodologies.

Mr. Andresen noted that preliminary comments are being accepted on the CFTC’s website prior to the release of proposed rules relating to FBOTs.