On October 1, 2018, as previewed in recent public remarks, Commodity Futures Trading Commission (“CFTC” or “Commission”) Chairman J. Christopher Giancarlo released a white paper revisiting the CFTC’s current approach to the cross-border application of its swaps regulations.1 In the White Paper, Chairman Giancarlo identifies a number of adverse consequences of the current approach and proposes a revamped framework. Significantly, based upon the principles set forth in the White Paper, he intends to direct the CFTC staff to develop and propose new rules addressing a range of issues related to reform of the CFTC’s cross-border swaps regime. The resulting rulemakings would replace the cross-border guidance issued by the CFTC in 2013 and the cross-border rules proposed in 2016, as well as address certain positions taken in CFTC staff advisories and no-action letters in the last several years. 2
Critique of Existing Framework: The White Paper identifies several adverse consequences of the CFTC’s current cross-border approach to swaps regulation, including the following:
- It is expressed in “guidance” rather than formal regulation subject to the Administrative Procedure Act.
- It is overly expansive, unduly complex, and operationally impractical, increasing transaction costs and reducing economic growth and opportunity.
- It relies on a substituted compliance regime that encourages a somewhat arbitrary, rule-by-rule comparison of CFTC and non-U.S. rules under which a transaction or entity may be subject to a patchwork of CFTC and non-U.S. regulations.
- It shows insufficient deference to non-U.S. regulators that have adopted comparable G20 swaps reforms and is inconsistent with the CFTC’s longstanding approach of showing comity to competent non-U.S. regulators in the regulation of futures trading.
Proposed Alternative Framework: The White Paper proposes an alternative cross-border framework built upon the following principles:3
- The CFTC should recognize the distinction between swaps reforms intended to mitigate systemic risk and reforms designed to address particular market and trading practices that may be adapted appropriately to local market conditions.
- The CFTC should pursue multilateralism, not unilateralism, for swaps reforms that are designed to mitigate systemic risk.
- The CFTC should take necessary steps to end the current division of global swaps markets into separate U.S. person and non-U.S. person marketplaces. Markets in regulatory jurisdictions that have adopted comparable G20 swaps reforms should each function as a unified marketplace, under one set of comparable trading rules and under one competent regulator.
- The CFTC shall be a rule maker, not a rule taker, in overseeing U.S. markets.
- The CFTC should act with deference to non-U.S. regulators in jurisdictions that have adopted comparable G20 swaps reforms, seeking stricter comparability for substituted compliance for requirements intended to address systemic risk and more flexible comparability for substituted compliance for requirements intended to address market and trading practices.
- The CFTC should act to encourage adoption of comparable swaps reform regulation in non-U.S. markets that have not adopted G20 swaps reform for any significant swaps trading activity.
Specific Regulatory Recommendations: Among other things, Chairman Giancarlo recommends that the following specific changes to the CFTC’s current cross-border approach be reflected in future rule proposals:
- Non-U.S. Central Counterparties (“CCPs”): Expand the use of the CFTC’s exemptive authority for non-U.S. CCPs that are subject to comparable regulation in their home country and do not pose substantial risk to the U.S. financial system, permitting them to provide clearing services to U.S. customers indirectly through non-U.S. clearing members that are not registered with the CFTC.
- Non-U.S. Trading Venues: End the current bifurcation of the global swaps markets into separate U.S. person and non-U.S. person marketplaces by exempting non-U.S. trading venues in regulatory jurisdictions that have adopted comparable G20 swaps reforms from having to register with the CFTC as swap execution facilities, thereby permitting such jurisdictions to each function as a unified marketplace, under one set of comparable trading rules and under one competent regulator.
- Non-U.S. Swap Dealers: Require registration of non-U.S. swap dealers whose swap dealing activity poses a “direct and significant” risk to the U.S. financial system; take into account situations where the risk to the U.S. financial system is otherwise addressed, such as swap transactions with registered swap dealers that are conducted outside the United States; and show appropriate deference to non-U.S. regulatory regimes that have comparable requirements for entities engaged in swap dealing activity.
- Clearing and Trade Execution Requirements: Adopt an approach that permits non-U.S. persons to rely on substituted compliance with respect to the swap clearing and trade execution requirements in jurisdictions that have adopted comparable reforms (“Comparable Jurisdictions”), and that applies those requirements in other jurisdictions that have not done so (“NonComparable Jurisdictions”) if they have a “direct and significant” effect on the United States.
- “ANE” Transactions: Take a territorial approach to U.S. swaps trading activity, including trades that are “arranged, negotiated, or executed” within the United States by personnel or agents of such non-U.S. persons. Non-incidental swaps trading activity in the United States should be subject to U.S. swaps trading rules. Such an approach addresses the current fragmentation of U.S. swaps markets, with some activity subject to CFTC rules and some activity not subject to CFTC rules. This approach is consistent with the principle of one unified marketplace, under one set of comparable trading rules and under one competent regulator.
The White Paper recognizes some of the significant criticisms commonly raised in relation to the CFTC’s current cross-border swaps framework and attempts to address them by recommending a number of potentially far-reaching changes, particularly in relation to jurisdictions that have already adopted reforms comparable to the CFTC’s swaps regulatory regime (i.e., Comparable Jurisdictions). Indeed, under the approach advocated in the White Paper, the degree of CFTC regulation generally would vary based upon whether the relevant entity is located within (1) the United States; (2) a Comparable Jurisdiction; or (3) a Non-Comparable Jurisdiction, in keeping with the overarching policy objective of focusing on systemic risk. The recommendations, further detailed in the White Paper, are intended to be presented to the full Commission for input and consideration and ultimately to result in future rulemaking.