CFTC proposals relax swaps rules extraterritoriality
US regulator the Commodity
Futures Trading Commission (CFTC) will give foreign banks the ability to avoid the
overseas reach of pending American swaps regulation.
In agency guidance released last
week on the cross-border application of the swaps provisions of the Dodd-Frank
Act, the CFTC has proposed that foreign banks will be able to use the
regulations of their home jurisdictions as “comparable requirements” for
entities under certain conditions.
Dodd-Frank says American
regulatory agencies have authority over derivatives deals if they are
carried out by a “US person” or affect the US economy. But foreign entities
engaging in swap dealing transactions with US persons at less than the de
minimis level would not be required to register or be regulated as swap
dealers. And some individual transactions executed by the overseas branches of
American firms may also escape the new rules if they do not impact US commerce.
But with a nod to recent missteps by one London-based bank and the events of the 2008
global financial crisis, Democratic CFTC commissioners have called to keep
rules as broad as possible.
“We must not forget the lessons
of the 2008 crisis and earlier." said Gary Gensler, chairman of the CFTC,
in a statement. “Swaps executed offshore by US financial institutions can send
risk straight back to our shores.”
Since the original rules were
proposed in 2010, the industry has been unclear how Dodd-Frank OTC derivatives reforms
would affect non-US swap dealers, non-US major swap participants, their US equivalents, and the foreign branches of both US swap
dealers and US major swap participants. Many have been concerned broad
definitions and all-encompassing rules would have extraterritorial reach beyond US borders, thus limiting the ability to trade swaps outside the US if an
organisation wanted to do business in the US.
The CFTC also suggested compliance to Dodd-Frank swap
reforms be phased in, rather than hit the industry at the one time.
Foreign firms will have a year to comply if they register
with the National Futures Association and submit a compliance plan for meeting
US or foreign swaps rules, but US firms must be compliant by January 2013.
As well as guidance on extraterritoriality matters, the CFTC
has also proposed rules to automate position and transaction reporting by
requiring the electronic submission of expanded trader identification and
market participant data.
The agency believes the proposed rules would strengthen its
existing trade practice and market surveillance programmes for futures, options and swaps.
The proposed rules incorporate a revised approach to the CFTC’s
previous initiative to collect an ownership and control report for
trading accounts active on designated contract markets or swap execution