SIFMA, ISDA and the FIA raised issues with a CFTC proposal to establish capital and liquidity requirements for swap dealers and major swap participants. They also weighed in on related record-keeping and reporting requirements.
In a comment letter on the proposal, SIFMA emphasized the need for an efficient model approval regime that would provide for the automatic acceptance by the CFTC (or its delegate) of internal capital models approved previously by the SEC, prudential regulators or certain qualifying foreign regulators. SIFMA argued that without such a regime, firms that did not have approved models and had to operate under the CFTC's "standardized" capital requirements would be subject to restrictions that left the firms unable to compete. SIFMA emphasized the importance of giving all firms a reasonable opportunity to have their internal models approved before the capital requirements become effective.
SIFMA also addressed the CFTC's proposed rules on liquidity, record-keeping and reporting. SIFMA urged the CFTC to revise the proposal to conform the swap dealer requirements more closely to those that apply currently to futures commission merchants ("FCMs"), broker-dealers and banks. Regarding the CFTC's proposed addition of new conditions to existing requirements, SIFMA argued that additional burdens would impose material costs without offering commensurate regulatory benefits. With respect to "substituted compliance," SIFMA urged the CFTC to accept the fact that non-U.S. swap dealers were regulated appropriately by their home country regulators, and to choose not to impose additional material regulatory burdens. (Full disclosure: Cadwalader assisted SIFMA in the preparation of its comment letter to the CFTC.)
The FIA and the ISDA also filed comment letters regarding the CFTC's proposed capital requirements. The FIA emphasized that heavy capital charges would be imposed on FCMs engaged in swaps activities, even if the FCMs were not required to be registered as swap dealers. ISDA raised issues of substituted compliance, the model approval process and regulatory comity.
Commentary / Steven Lofchie
One of the principal observations made in the SIFMA letter is that the number of FCMs regulated by the CFTC has been cut in half since the adoption of Dodd-Frank. While there is no single cause for this flight from the FCM business, it seems likely that increased regulatory costs have played a meaningful role in reducing the number of financial service providers and increasing concentration. Accordingly, SIFMA urged the CFTC to be mindful that excessive regulatory costs as to swaps activities could discourage dealer participation in the U.S. swaps markets.
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