ISDA and SIFMA (collectively, the "Associations") urged the SEC to address disparities between its proposed rules on "risk mitigation techniques" for security-based swaps (the "proposal") and the existing swap rules of the CFTC.
The Associations warned that the proposal would result in the "same firms and economically indistinguishable products" being subject to "similar, but not identical regulatory regimes." According to the Associations, discrepancies between SEC and CFTC rules will result in substantial costs. Further, the Associations said, any discrepancy could increase compliance costs for derivatives market participants and may "detract" from satisfying the intended goal of the proposed rules, which is to reduce risk.
The Associations suggested that the SEC consider creating a "regulatory safe harbor" that would permit SEC-regulated firms to rely on compliance with similar CFTC rules. This approach, according to the Associations, would "preserve each agency's regulatory oversight authority" while simultaneously allowing market participants to reduce compliance complexity. The Associations asserted that further "harmonization" of the SEC rules with existing CFTC rules is the "preferred pathway forward."
Commentary / Steven Lofchie
This is a significant letter, not so much for its comments on the particular rules, as for what it says about the costs of regulation; i.e., that regulatory change is expensive and that regulatory complexity is expensive, even ignoring the substance of any particular rule. Put differently, in many cases, regulated firms prefer rule stability to rule improvement or liberalization.
That observation is also consistent with a very slow rate of economic growth during the post-Dodd-Frank years. Even disregarding the poor quality of the Dodd-Frank legislation, the pace of regulatory change simply overwhelmed market participants. Economic improvement correlates with regulatory stability. This is not to say that attempts to improve Dodd-Frank should be abandoned, but changes at the edges or changes that add complexity appear not to be worthwhile.
The letter also demonstrates the problem with having multiple regulators adopting rules governing essentially the same activity. Either the multiple regulators must agree on a single set of rules (which raises the question as to the purpose of multiple regulators) or they fail to agree (in which case, you have a complicated mess). See also Lofchie Music Selection.
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