United States: CFTC Addresses Cross-Border Guidance Again

Last Updated: August 11 2016
Article by Nihal S. Patel

Most Read Contributor in United States, September 2017

The CFTC announced two actions concerning the application of its swap rules to cross-border transactions: (i) a final response to the remand order in SIFMA, et al. v. CFTC, and (ii) a time-limited no-action letter that extends relief from certain transaction-level requirements under the CEA to non-U.S. swap dealers ("SDs") that are registered with the CFTC.

The SIFMA, et al. v. CFTC order by the U.S. District Court for the District of Columbia remanded eight swaps-related rulemakings to the CFTC in order to resolve what the court held to be inadequacies in the agency's consideration of costs and benefits. In response to the comments it received, the CFTC concluded that "the record does not establish a need to make changes in the substantive requirements of the remanded rules as originally promulgated at the present time and in the context of the SIFMA remand order."

In addition, the CFTC Divisions of Swap Dealer and Intermediary Oversight ("DSIO") and Clearing and Risk and Market Oversight (collectively, "Divisions") extended no-action relief for non-U.S. SDs from any applicable "Transaction-Level Requirement" when entering into swaps with non-U.S. persons that are not "guaranteed affiliates" or "conduit affiliates." The Divisions established that the relief will expire prior to the earlier of September 30, 2017 or the effective date of any CFTC action with respect to matters addressed in the DSIO Advisory, CFTC Letter 13-69 (which contains an oft-cited interpretation of "arranging, negotiating, or executing").

In a supporting statement, CFTC Chair Timothy Massad emphasized recent steps taken by the CFTC to increase the harmonization of derivatives regulation across borders, including recognition of central clearing counterparties which were coordinated with the European Commission, as well as ongoing efforts to harmonize swap execution facility and data reporting requirements. Chair Massad also stated that he would ask the CFTC to consider a rule addressing the "arrange, negotiate, or execute" issues raised by the DSIO Advisory.

In a dissenting statement, CFTC Commissioner J. Christopher Giancarlo explained that he did not find fault with the Commission's response to the District Court decision, but found reason to question what he characterized as an "uncoordinated approach to regulation of swaps trading." He criticized the Commission's most recent approach to cross-border application of the swaps margin requirements, and concluded that the Cross-Border Guidance was overbroad: "[it] basically stated that every single swap a U.S. Person enters into, no matter where it is transacted, has a direct and significant connection with . . . commerce of the [United States]." Commissioner Giancarlo also cautioned the CFTC that its approach has caused foreign regulators to respond in kind, and cited the European Union's significant delay of its central clearing counterparty accord and its uncleared swaps margin rules as examples.

Commentary / Nihal Patel

Three years after its adoption, the CFTC's problematic approach to the application of its swap requirements across borders has few ardent supporters (with the possible exception of former CFTC Chair Gary Gensler during said adoption). The CFTC acknowledged the mistake implicitly when it adopted  actual rules for the application of margin requirements across borders. In the post-Gensler era, the CFTC generally has been more willing to consider the effect of its rules outside of the United States, even if it has not been willing to walk back the ill-conceived Cross-Border Guidance completely. For example, in a recent  proposal concerning a new mandatory clearing determination, the CFTC proposed harmonizing that mandate with those in non-U.S. jurisdictions.

Chair Massad's statement about the CFTC's body of cross-border work might be a shade too rosy, but Commissioner Giancarlo's statement might be too harsh. He faults the CFTC for the delay of European margin requirements, but fails to note that regulators in the United States, Japan, Europe, and elsewhere agreed on a timeframe that the European Union chose not to honor. To be sure, the CFTC  should work toward harmonization on that front, but it's hard to argue that Europe's delay is the CFTC's fault.

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