06.05.2019
By Shanny Basar

CFTC To Vote On Cross-Border Swaps Rules

Christopher Giancarlo, chairman of the US Commodity Futures Trading Commission, said he intends to call three rulemakings on supervising cross-border swaps activity for a vote before he leaves the US regulator.

Giancarlo gave a keynote address at the FIA’s International Derivatives Expo in London this morning.

In September last year Giancarlo gave a speech in London proposing to change the CFTC’s framework for cross-border swaps regulation. The next month he published a white paper on the US regulator deferring supervision to the home regulator in third-country jurisdictions that have adopted comparable G20 swaps reform

This morning Giancarlo discussed progress on the proposal, three rulemakings being considered by the CFTC and  the plan for  the remaining rules that he expect to be taken up under his successor. Giancarlo said he expects to step down as chairman in the middle of next month, to be replaced by Heath Tarbert.

He stressed that the CFTC does not have extraterritorial power and should not seek to regulate swaps activities outside the US unless those activities “have a direct and significant connection with activities in, or effect on, commerce of the US.”

“Accordingly, determining what is “direct and significant” to the U.S. financial system should be at the heart of the CFTC’s approach to cross-border issues,” he added.

In addition, the CFTC should differentiate between swaps reforms designed to mitigate systemic risk and those that address market and trading practices.

The former includes swaps clearing, margin for uncleared swaps, dealer capital, and record keeping and regulatory reporting. The latter includes public trade reporting and price transparency, trading platform design, trade execution methodologies and mechanics, personnel qualifications an examinations.

Christopher Giancarlo, CFTC

Giancarlo continued: “Mutual commitment to cross-border regulatory deference ideally should mean that market participants can rely on one set of rules – in their totality – without fear that another jurisdiction will seek to selectively impose an additional layer of particular regulatory obligations that reflect differences in policy emphasis, or application of local market-driven policy choices beyond the local market.”

As a result of the white paper, three rulemakings are now being considered by the CFTC.

The first clearing proposal addresses the registration of non-US derivatives clearing houses that that clear swaps for US persons, such as the London Stock Exchange Group’s LCH Ltd which was the first non-US derivatives clearing organization to register with the CFTC 18 years ago.  Others have registered after the enactment of Dodd-Frank in 2010.

“Non-US DCOs that do not pose a substantial risk to the US financial system would have the option of being fully registered with the CFTC as a DCO but meet their registration requirements through compliance with their home country requirements,” he added. “The home country regulator would have supervisory primacy over these DCOs with the CFTC much more narrowly focused than is currently the case, from both a legal and practical perspective, on US customer funds protection at these DCOs.”

The commissioner said it is important too use objective criteria to determine whether a non-US CCP potentially poses substantial risk to the US financial system and the regulator will use two 20% tests.

“The first focuses on the percentage of initial margin from a “US origin” (initial margin posted by clearing members ultimately owned by US-domiciled holding companies, regardless of the domicile of the clearing member) at a specific non-US DCO,” he explained.   “The second focuses on the US origin business of the non-US DCO as a percentage of the overall US cleared swaps market.”

Giancarlo added that objective and transparent criteria should be used by all all regulators around the world to provide appropriate predictability and stability to the markets.

The CFTC is also considering a rule proposal on the registration and regulation of non-US swap dealers and major swap participants, as well as foreign branches of US banks.

Giancarlo said he intends to call the three rulemakings for a vote before he leaves the CFTC.

He continued that the CFTC recently granted substituted compliance to Australia with respect to margin requirements for uncleared swaps. The regulator also amended a previous substituted compliance determination for Japan with respect to the uncleared margin requirements. The CFTC has previously granted substituted compliance for the European Union with respect to the uncleared margin requirements. In March, the CFTC and the Monetary Authority of Singapore announced the mutual recognition of certain derivatives trading venues.

“This is all a good start, and I am pleased that many of these comparability determinations came under my chairmanship,” he said. “However, I believe the CFTC should continue to make additional comparability determinations wherever appropriate.”

In addition to CCPs, Giancarlo said the  CFTC should be committed to trying to make comparability determinations for trading venues in all the major swaps jurisdictions where the vast majority of over 90% of global swaps activity takes place.

The CFTC already has exempted trading venues from registration as swap execution facilities in the EU and Singapore, and a comparability assessment for trading venues in Japan is close to completion.  After the UK leaves the European Union, the CFTC intends to extend the exemption from registration as SEFs to UK trading venues. “This leaves Hong Kong, Australia, Canada, and Switzerland to account for most of the world’s non-US swap activity,” Giancarlo added.

He concluded that swaps markets are global so regulators should not divide the world  into artificially separate and less resilient liquidity pools based on the nationality of trading participants.

“That will fragment markets into individual trading pools of liquidity that are shallower, more brittle, and less resilient to market shocks, thereby increasing systemic risk rather than diminishing it,” he added. “Instead, the approach of deference is intended to thwart such fragmentation, so as not to impede hedging of financial risk that is necessary for global economic growth.”

Fragmentation

The World Federation of Exchanges has also published a statement warning about cross-border fragmentation arising from unjustified dissonance between regulatory regimes. The WFE’s statement comes days before the G20 Finance Ministers and Central Bank Governors Meeting between 8-9 June in Japan where market fragmentation will be on the agenda.

Nandini Sukumar, chief executive at WFE, said: in a statement: “We welcome the G20 focus on the topic of cross-border financial market regulatory fragmentation, under the Japanese G20 Presidency. The WFE believes that global regulatory coherence can and should be improved, both in substantive and procedural terms.

Sukumar added that a significant role can and should be played by the international standard-setting bodies, who are also well placed to address emerging trends, such as digital assets, as well as issues arising from traditional markets.

The International Organization of Securities Commissions has also published a report that examines instances of regulatory-driven fragmentation in wholesale securities and derivatives markets and considers what actions regulators can take to minimize its adverse effects.

Jun Mizuguchi, Deputy Commissioner for International Affairs at the Japan Financial Services Agency, and an IOSCO co-chair on this work said in a statement: “Since the financial crisis, well-intentioned regulatory implementation has sometimes led to unintended fragmentation of markets. In the spirit of the G-20 leaders in Pittsburgh, this report welcomes the advances made by regulators in deferring to one another but encourages us towards further, smoother, cross-border collaboration.”

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