ISDA and the U.S. Chamber's Center for Capital Markets Competitiveness ("CCMC") advocated for harmonizing the CFTC and SEC derivatives regulatory frameworks through a regulatory "safe harbor" mechanism.
In a white paper, the authors argued that there is "considerable discord" between the CFTC rules governing "swaps" and the SEC rules (some proposed, some final) governing "security-based swaps." The organizations contend that such discord will be apparent when the SEC rules become effective and would result from unnecessary costs on dually registered firms attempting to comply with similar but different rules for products that often are substantially identical. The authors argue that a rule-by-rule gap analysis and harmonization effort would be "costly and likely take years to complete," and that instead, the SEC and CFTC should provide "safe harbor" exemptive orders to provide that CFTC-registered firms could apply CFTC rules to security-based swaps and SEC-registered firms could apply SEC rules to swaps.
The organizations suggest that the safe harbor could be used either broadly or at a more granular level by permitting compliance with particular rules of one agency in lieu of their equivalent rules at the other agency. In particular, the paper indicates that rules governing registration requirements, trade reporting, business conduct standards, and chief compliance officer requirements are provisions for which the safe harbor would be especially effective.
Commentary / Nihal Patel
The ISDA-CCMC paper provides a novel solution to what is a tricky regulatory problem. That is, what is the best way to deal with the fact that the CFTC and SEC have adopted different rules governing similar products? It seems to be a question that the regulators are struggling with. SEC Chairman Clayton and CFTC Chairman Giancarlo have repeatedly stressed the need for harmonization of the rules. However, few concrete steps have been taken to actually achieve that harmonization.
The ISDA-CCMC approach has the benefit of efficiency, in that it would not require a detailed rule-by-rule analysis and would avoid the need for one or both of the agencies to go through the process of amending their rules (again). However, it also raises questions (such as the cross-border treatment and potential administrative procedure hurdles).
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