Industry Groups Fight Cross-Border Rule

Terry Flanagan

Industry groups are trying to stop rules that govern the cross-border aspects of OTC swaps trading.

The groups–Securities Industry and Financial Markets Association (Sifma), the International Swaps and Derivatives Association (Isda), and the Institute of International Bankers (IIB)—have filed a legal challenge to the Commodity Futures Trading Commission’s (CFTC) Cross-Border Rule, and to the cross-border aspects of related rules. The rule was published by the CFTC in July 2013.

The groups claim that the rule unlawfully circumvents the requirements of the Administrative Procedure Act and the Commodity Exchange Act by characterizing its regulations as “guidance.”

They also say that the CFTC failed to conduct any cost-benefit analysis, conducted a flawed rulemaking process, and imposed a series of rules that are contrary to the spirit and the letter of international cooperation and may harm global markets.

Policymakers have expressed concerns about the CFTC’s actions, including the November 14 Cross-Border and November 15 SEF advisories. The European Commission has stated it was “very surprised by the latest CFTC rules which seem to us to go against both the letter and spirit of the path forward agreement,” and that the rules “are another step away from the kind of inter-operable global system that we want to build.”

“Sifma and our members support responsible regulatory reform that will bring transparency and accountability to the derivatives markets,” said Sifma CEO Judd Gregg. The CFTC’s arbitrary and unilateral approach to cross-border regulation is backdoor rulemaking which has led to widespread market confusion and is creating significant impediments to the orderly functioning of financial markets worldwide.”

The lawsuit alleges that the CFTC failed to follow key requirements mandated by law with regard to development and issuance of the Cross-Border Rule. The Associations believe that the Cross-Border Rule violates existing agreements between global policymakers, and works against the G20 Commitment to “implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets.”

The Cross-Border Rule, they say, further creates significant financial, legal and administrative burdens on market participants that could harm liquidity and the ability of end-users to manage their risks.

As a result of the confusing process around the development of the Cross-Border Rule and the CFTC’s lack of coordination with the SEC or foreign regulatory bodies, non-U.S. counterparties have become increasingly reluctant to transact with U.S. based dealers or even with non-U.S. dealers that have U.S. personnel involved in the transaction.

“The CFTC’s Cross-Border Rule, however, is a step backward in our mutual efforts to develop a robust, consistent and global framework for OTC derivatives regulation that reduces systemic risk,” said Isda chairman Stephen O’Connor. “It harms the financial system and market participants and adversely impacts the ability of end-users to hedge their business and financial risks.”

The Cross-Border Rule could undermine the global commitment to coordination and lead to such conflicts in several ways, the groups claim. For example, a firm could be required to execute the same trade on two different platforms and to clear the same transaction on two different clearinghouses. Transactions could be required to be reported in two jurisdictions.

The Cross-Border Rule could further create significant administrative, legal and financial costs for market participants with no apparent benefits. The Securities and Exchange Commission (SEC) has acknowledged the importance of coordination in its substituted compliance approach to cross-border swaps rulemaking for securities-based swaps, the groups noted, while CFTC relief provided thus far is inadequate in scope and/or time limited, leaving critical uncertainties pending.

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