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Regulatory Watch

CFTC Proposes Relaxed Swap Rules

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November 09, 2018

CFTC white paper aims to reform cross-border regs, bring liquidity

Leatherbound booksA new Commodity Futures Trading Commission white paper will provide a roadmap for the regulatory agency’s goal of reforming cross-border swap rules, providing end users with less work and adding more liquidity.

“If [CFTC Chairman] Giancarlo were able to get [these initiatives] enacted through the CFTC regulation, the most direct benefit could be more swap dealers willing to transact with US institutions,” said Christopher Bender, director of regulatory advisory at Chatham Financial.

In the white paper, Chairman J. Christopher Giancarlo identifies several adverse consequences of the CFTC’s current cross-border approach. They include: 

  • Ambiguity stemming from expressing rules as guidance rather than regulation subject to the Administrative Procedure Act.
  • Unnecessary complexity that increases transaction costs.
  • A substitutive compliance regime requiring burdensome rule-by-rule comparison.
  • Insufficient deference to non-US regulators that have adopted comparable, if somewhat different rule sets.

The white paper discusses an array of measures to address these consequences that Mr. Giancarlo intends to direct CFTC staff to develop as new rule proposals. From the perspective of end users, including corporates, one of the white paper’s more impactful recommendations is to take a territorial approach to US swap-trading activity, including “trades that are arranged, negotiated, or executed within the United States by personnel or agents of such non-US persons.”

Under the white paper’s approach, European swap trading venues and central counterparties (CCPs), as well as dealers subject to other regulatory regimes deemed comparable to the US’s, could execute and clear swap transactions by US institutions without being subject to Dodd-Frank-Act requirements. Under, Mr. Giancarlo’s proposed territorial approach to cross-border transactions, swaps executed by foreign dealers in the US would be subject to Dodd-Frank-Act rules, while swaps executed by US institutions in Europe would be subject to European Market Infrastructure Regulation (EMIR) or Markets in Financial Instruments Directive II (MiFID II) rules.

Mr. Giancarlo is looking to bring more clarity to determining which regulatory regimes apply under cross border trading scenarios. If successful, this means that US corporates may find EU dealers more willing to transact with them. Today, substituted-compliance requirements require counterparties to compare regulatory regimes rule-by-rule, to ensure they’re complying with differences in the regimes—a complicated and laborious task.

“Cross-border guidance currently looks at an array of factors, and there’s a whole matrix for determining when a transaction has a US connection, including whether it’s guaranteed by a US entity, even if the trading entity is domiciled in a foreign jurisdiction, or if one party to the transaction is a US person (institution),” Mr. Bender said.

Under the white paper’s proposals, he added, “If you’re transacting in Europe and fully compliant with EMIR, then you would be deemed fully compliant with Dodd-Frank, and you wouldn’t have to worry about applying Dodd-Frank rules to the trade. This would help streamline the regulatory maze in existence now.”

Mr. Bender noted that a US parent may have a European subsidiary engaging in a swap with an Australian bank counterparty. In that case, the European subsidiary is a European Union-domiciled “person,” but because its parent is headquartered in the US it may be considered a US person by the CFTC’s US Person guidance. Hence it could have to comply with all the rules the regimes hold in common as well as determine where there are differences and comply with those.

“And they would have to think about all the different requirements in those [areas], such as whether clearing rules apply when trading interest-rate swaps.

To avoid becoming entrapped in the Dodd-Frank rule web, Mr. Bender said, some non-US banks have put in place blanket prohibitions on trading with US institutions. Those concerns would be alleviated, potentially “expanding the pool of liquidity available to US swap market participants,” he added.


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