The U.S. Commodity Futures Trading Commission (CFTC) is considering revised staff proposals relating to the definition of “U.S. Person”, the availability of “substituted compliance” and the cross border aggregation of swaps, each modifying the initial proposed cross-border guidance dated June 29, 2012. At the meeting of the Global Markets Advisory Committee (GMAC) in Washington, DC on November 7, 2012, Commissioner Gensler announced his intent to issue the revised guidance before year end. However, the revised guidance is subject to further review by the CFTC Commissioners and, as their views on these issues do not appear to be in unison, the final form of the guidance and the timing of its issuance remains uncertain.

During a detailed discussion chaired by Commissioner Sommers, a number of international regulators, including from Australia, Canada, the EU, Hong Kong, Japan and Singapore, along with other GMAC members, raised their serious concerns with the CFTC’s proposed cross-border guidance, primarily relating to the likelihood of overlapping and/or duplicative regulation and the timing of the rulemakings. Many of the international regulators suggested that the implementation of the CFTC cross-border rules was proceeding at an unnecessarily accelerated pace, without the CFTC having engaged fully with other international regulators, the Securities and Exchange Commission (SEC) and market participants. In contrast, it was said that the SEC, by engaging in a process of proposed rulemaking, drawing in commentary and feedback from industry participants before publication of a final rule, will be taking a more measured approach. Specific challenges were raised with respect to the unnecessarily broad definition of “U.S. Person” being proposed by the CFTC, the lack of clarity and narrow scope of the concept of “substituted compliance,” and the proposals with respect to how trades would need to be aggregated on a cross-border basis to establish if the de minimis threshold requiring registration as a swap dealer would be triggered. Concerns were also raised that the overall effect of the new rules could result in the assertion by the CFTC of jurisdiction over a broad category of activities carried on by persons outside the U.S.

The consensus from the international regulators was that there was a need for better coordination and enhanced mutual recognition for new and emerging regulatory schemes being developed outside the U.S. Proceeding with the current, fragmented approach, would result in inconsistencies, participants pulling out of markets and reduced liquidity. CFTC Chairman Gensler indicated that he expected further guidance would be available by the end of 2012, although it was also apparent that there remained disagreement among the commissioners as to both the substance and timing of implementation of the final cross-border rules. We therefore expect that any such final guidance will be subject to further vigorous negotiation behind-the-scenes, which may result in a more phased approach. If this does not happen, as one representative from Europe stated: “Washington: we have a problem.”