FOLLOWING up on a hearing that brought to light the fact that coordination between foreign and domestic regulators could soon lead to a disruption in the derivatives markets, the Commodity Futures Trading Commission (CFTC) approved an exemptive order Dec. 21 giving foreign banks until July to comply with certain requirements of the Dodd-Frank Wall Street Reform & Consumer Protection Act.
The prior day, members of Congress sent a letter to the five CFTC commissioners seeking the delay as foreign regulators identified numerous potential conflicts, inconsistencies and gaps between the rules for cross-border implementation.
The international reach of CFTC swap rules has been one of the most controversial elements of the agency's Dodd-Frank rules, which was expressed in testimony at a Dec. 20 hearing by the House agriculture subcommittee on general farm commodities and risk management (Feedstuffs, Dec. 24). CFTC had been facing a year-end deadline by which it needed to either decide how its rules apply overseas or delay their implementation.
Under the exemptive order, a non-U.S. person who registers with the commission as a swap dealer or major swap participant may delay compliance with certain entity-level requirements adopted under the Dodd-Frank act, while non-U.S. swap dealers and major swap participants as well as foreign branches of U.S. swap dealers and major swap participants may delay compliance with certain transaction-level requirements adopted under the bill (subject to specified conditions).
The CFTC vote was conducted via seriatim and was approved four to one. The exemptive order expires on July 12, 2013.
Tim Ryan, president and chief executive officer of the Securities Industry & Financial Markets Assn., said CFTC took a necessary and important step by delaying the rule.
"It is important that the commission provide relief to allow for better coordination with regulators in other jurisdictions to avoid unnecessary fragmentation, duplication and conflict among rules for derivatives markets," Ryan said.
The order also includes a definition of the term "U.S. person" that will apply for purposes of the order. House leaders had expressed concern that CFTC and the Securities & Exchange Commission each had a different definition of U.S. person.
The CFTC commissioners said the definition, for purposes of the order, is largely similar to criteria set out in an Oct. 12 no-action letter from CFTC staff, with modifications made in response to comments received and the inclusion of certain entities with a principal place of business in the U.S. on a phased-in basis.
The order provides that a non-U.S. person (regardless of whether the non-U.S. person's swap obligations are guaranteed by U.S. persons) does not need to include in its calculation of the aggregate gross notional amount of swaps connected with its swap dealing activity or in its calculation of whether it is a major swap participant any swap where the counterparty is a non-U.S. person or a foreign branch of a U.S. person who is registered (or intends to register) as a swap dealer.
"While we continue to review and may comment further, it is important that CFTC continue to provide relief to avoid confusion in the market like the market participants experienced on and around Oct. 12," Ryan said.
The order also provides relief from the requirement to include, in determining whether the swap dealing activities exceed the de minimis threshold, the aggregate notional value of swap dealing transactions entered by its affiliates under common control.
Under the order, a non-U.S. person currently engaged in swap dealing activities with U.S. persons is not required to include, in its determination of whether it exceeds the de minimis threshold, the swap dealing transactions of any of its U.S. affiliates. Also, if the non-U.S. person is an affiliate of a person who is registered as a swap dealer, it is not required to include the swap dealing transactions of any of its non-U.S. affiliates so long as each excluded affiliate is either currently engaged in swap dealing activities with U.S. persons or is registered as a swap dealer.
CFTC also approved solicitation of further comments on cross-border issues related to the aggregation requirement in the swap dealer determination, the definition of U.S. person and foreign branches. The comment period for these issues will be open for 30 days after publication in the Federal Register.