Banks Ponder Extraterritoriality Issues

Terry Flanagan

Dealers urge SEC and CFTC to not subject overseas affiliates to dual regulations.

As U.S. regulators seek to establish consistency with international swaps regulations, large banks are urging them to limit the extraterritorial reach of rules created under the Dodd-Frank Act.

A group of money center banks, all of them major swaps dealers, have outlined recommendations to the SEC and CFTC on international issues related to Title VII of Dodd-Frank, which covers OTC derivatives.

It’s essential that regulators provide clear and consistent guidance regarding the territorial application of Title VII well before its registration and other substantive requirements become effective, the banks said in a comment letter.

The banks include Bank of America Merrill Lynch, Barclays Capital, BMP Paribas, Citi, Credit Agricole, Credit Suisse, Deutsche Bank, HSBC, Morgan Stanley, Nomura Securities, Societe Genereale, and UBS Securities.

“Many global institutions will find it challenging or impossible to comply with those requirements until there is clear and consistent guidance regarding Title VII’s territorial application,” the banks said.

Under the Dodd-Frank Act, the Securities and Exchange Commission and the Commodity Futures Trading Commission are required to jointly study and report to Congress on swap regulation and clearinghouse regulation in the United States, Europe, and Asia, and to identify areas of regulation that need to be harmonized.

A major part of the report, which by law must be produced no later than March 2012, will be devoted to a comparison of the different regulatory regimes.

The questions being posed by the SEC and CFTC frame the differences across national boundaries, and seek to ascertain whether such differences should be harmonized.

The report must identify major dealers, exchanges, clearinghouses, clearing members, and regulators in each geographic area and describe the major contracts (including trading volumes, clearing volumes, and notional values), methods for clearing swaps, and systems used for setting margins.

The banks are recommending that the SEC and CFTC take into account the fact that non-U.S. firms have conducted swap activities with U.S. persons, and vice versa, for many years, including through non-U.S. branches and affiliates, that many non-U.S. jurisdictions already regulate swaps dealers, including non-U.S. branches and affiliates of U.S. and non-U.S. firms, and the G-20 jurisdictions are working to supplement their existing regulatory regimes to incorporate derivatives-related clearing and market transparency reforms to achieve regulatory objectives similar to those of Dodd-Frank.

A non-U.S. person should not be deemed a U.S. swap dealer solely as a result of executing swaps with U.S.-registered swaps dealers, the banks said.

Exposures arising from swaps between non-U.S. persons should not be taken into account for the purpose of determining whether that person is a major swap participant (MSP), regardless of where or how those swaps are executed or whether they involve U.S. undeliers, since the manner of execution or undelier for a swap is irrelevant to whether the swap poses a risk to U.S. counterparties.

Dood-Franks’s clearing and trading requirements should apply to any swap designated for mandatory clearing by the relevant Commissions if that swap has at least one U.S. person as a counterparty, and reporting requirements should apply to any transaction that has at least one U.S. counterparty, the banks said.

However, in each case, the Commissions should facilitate access to non-U.S. clearing organizations, SEFs, and SDRs by U.S. persons, and vice versa.

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