CFTC Provides Cross-Border Relief

Terry Flanagan

The Commodity Futures Trading Commission has issued relief and guidance on the regulation of entities engaged in cross-border swaps activities. However, market participants say the CFTC needs to do more to clarify which regulations will apply to such entities.

“Unfortunately, as it is currently set out, there are significant problems with the draft final guidance which we believe will result in serious unintended consequences to non-U.S. collective investment schemes and investment funds,” said Joanne De Laurentiis, president and CEO of The Investment Funds Institute of Canada, in a comment letter. “Our primary concern is with the draft definition of U.S. Person and how it could capture non-U.S. funds.”

In light of the Commission’s announcement last week of an agreement on a common Path Forward with the European Union, which relies on “substituted compliance” and regulatory collaboration, IFIC encouraged the CFTC to engage in discussions with key regulators in other jurisdictions to proceed in a similar manner to ensure a coordinated and consistent approach.
Under the CFTC guidance, each of the 13 categories of requirements—five entity-level, eight transaction-level—would be subject to separate determinations of substituted compliance.

Transaction-level requirements include clearing and swap processing, margining, mandatory trade execution, trade reporting, and trade confirmation.

Referring to the May 28, 2013 letter of Steven Maijoor and Jonathan Faull of the European Commission, Directorate General Internal Market and Services, IFIC supported their request for an extension in the exemptive order for such time “until international principles on cross-border swap rules have been agreed by G20 Leaders and implemented in our respective jurisdictions.”

Substituted compliance would avoid confusing and conflicting regulations.

“In our view, it is essential that regulatory regimes in the context of OTC derivatives re clear and unambiguous and do no result in dual regulation with potentially conflicting sets of requirements,” said Philippa Hall, head of regulatory strategy at F&C Investments, in a comment letter.

London-based F&C manages assets of £98.8 billion across major asset classes and uses OTC derivatives in client and fund portfolios where appropriate.

European asset managers and their clients will be subject to the requirements of the European Market Infrastructure Regulation (Emir) covering clearing of OTC derivatives, reporting obligations for derivatives and risk mitigation requirements for non-cleared derivatives, and in due course MiFID/MiFIR will deal with the trading of OTC derivatives on trading venues. Other jurisdictions are putting in place similar requirements to conform with the G20 commitments.

Under the exemptive order, non-U.S. swap dealers and non-U.S. major swap participants (MSPs) established in Australia, Canada, the European Union, Hong Kong, Japan or Switzerland may delay compliance with most entity-level and transaction-level for which substituted compliance is possible until December 21, 2013.

Foreign branches of a U.S. dealer or MSP may also rely on substituted compliance until December 21.

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