On October 1, 2018, the Commodity Futures Trading Commission’s (“CFTC”) Chairman, J. Christopher Giancarlo released a White Paper entitled, “Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation” (“Cross-Border White Paper 2.0”). Chairman Giancarlo intends to direct the CFTC staff to put forth new rule proposals, which if adopted, would put in place an alternative cross-border framework that would replace the cross-border guidance issued by the CFTC in 2013 and the cross-border rules proposed by the CFTC in 2016, as well as address certain positions taken in CFTC staff advisories and no-action letters.
The proposed rulemakings, which will be open for public comment, will address a range of cross-border issues in swaps reform – from the registration and regulation of swap dealers and major swap participants to the registration of non-U.S. swaps central counterparties (CCPs) and swaps trading venues.
The Cross-Border White Paper 2.0 specifically includes the following recommendations:
Expand the use of the CFTC’s exemptive authority for non-U.S. CCPs that are subject to comparable regulation in their home country and do not pose substantial risk to the U.S. financial system, permitting them to provide clearing services to U.S. customers indirectly through non-U.S. clearing members that are not registered with the CFTC.
Non-U.S. Swap Dealers
Require registration of non-U.S. swap dealers whose swap dealing activity poses a “direct and significant” risk to the U.S. financial system; take into account situations where the risk to the U.S. financial system is otherwise addressed, such as swap transactions with registered swap dealers that are conducted outside the United States; and show appropriate deference to non-U.S. regulatory regimes that have comparable requirements for entities engaged in swap dealing activity.
Non-U.S. Trading Venues
End the current bifurcation of the global swaps markets into separate U.S. person and non-U.S. person marketplaces by exempting non-U.S. trading venues in regulatory jurisdictions that have adopted comparable G20 swaps reforms from having to register with the CFTC as swap execution facilities
Clearing and Trade Execution Requirements
Adopt an approach that permits non-U.S. persons to rely on substituted compliance with respect to the swap clearing and trade execution requirements in Comparable Jurisdictions, and that applies those requirements in Non-Comparable Jurisdictions if they have a “direct and significant” effect on the United States.
Take a territorial approach to U.S. swaps trading activity, including trades that are “arranged, negotiated, or executed” (“ANE”) within the United States by personnel or agents of such non-U.S. persons. Non-incidental swaps trading activity in the United States should be subject to U.S. swaps trading rules. Such an approach addresses the current fragmentation of U.S. swaps markets, with some activity subject to CFTC rules and some activity not subject to CFTC rules. This approach is consistent with the principle – one unified marketplace, under one set of comparable trading rules and under one competent regulator.
The Cross-Border White Paper 2.0 also discusses a few ANE scenarios and indicates that as the CFTC staff proposes rules to address ANE Transactions, it will need to work through the various permutations and fact patterns to develop an approach that both avoids fragmenting the swaps market in the United States and imposing unwarranted costs on market participants. Ultimately, the Cross-Border White Paper sets forth that the goal must be, both in non-U.S. markets and in the United States: one unified marketplace, under one set of comparable trading rules and one competent regulator.
The Cross-Border White Paper 2.0 recommendations are built upon the following guiding principles:
- The CFTC should recognize the distinction between swaps reforms intended to mitigate systemic risk and reforms designed to address particular market and trading practices that may be adapted appropriately to local market conditions.
- The CFTC should pursue multilateralism, not unilateralism, for swaps reforms that are designed to mitigate systemic risk.
- The CFTC should take necessary steps to end the current division of global swaps markets into separate U.S. person and non-U.S. person marketplaces. Markets in regulatory jurisdictions that have adopted comparable G20 swaps reforms should each function as a unified marketplace, under one set of comparable trading rules and under one competent regulator.
- The CFTC shall be a rule maker, not a rule taker, in overseeing U.S. markets.
- The CFTC should act with deference to non-U.S. regulators in jurisdictions that have adopted comparable G20 swaps reforms, seeking stricter comparability for substituted compliance for requirements intended to address systemic risk and more flexible comparability for substituted compliance for requirements intended to address market and trading practices.
- The CFTC should act to encourage adoption of comparable swaps reform regulation in non-U.S. markets that have not adopted G20 swaps reform for any significant swaps trading activity.
We will continue to monitor upcoming developments in the CFTC’s rulemakings for its approach to regulating cross-border swaps transactions.