Regulators to Issue Cross-Border Swaps Guidance

Terry Flanagan

U.S. securities regulators are zeroing in on issues of extraterritoriality as they apply to swaps provisions of the Dodd-Frank Act, as they scramble to meet the Dec. 31 implementation date conceived by the G20.

“CFTC staff will soon be recommending to the Commission to publish for public comment a release on the cross-border application of swaps market reforms,” said Ananda Radhakrishnan, director of the division of clearing and intermediary oversight at the Commodity Futures Trading Commission, during a panel discussion at an industry event sponsored by Markit in New York on May 31.

The release will consist of interpretive guidance on how these reforms apply to cross-border swap activities.
It also will include an overview as to when overseas swaps market participants, including swap dealers, can comply with Dodd-Frank reforms through reliance on comparable and comprehensive foreign regulatory regimes, or what the CFTC calls “substituted compliance.”

The SEC also plans to publish interpretive guidance on cross-border issues.

“In addition to the need for final rules regarding the dealer and participant registration process, we are very aware of the importance of providing market participants with an implementation roadmap and rules of the road for cross-border issues before requiring dealer and major participant registration,” SEC chairman Mary Schapiro said in April.

Market participants find the prospect of having to comply with registration, clearing and reporting requirements across multiple jurisdictions “deeply troubling,” said Robert Pickel, CEO of International Swaps and Derivatives Association.

“What our member firms now face is continued uncertainty regarding the reach of regulation, even as they face looming decisions to register or put in place extensive business conduct procedures,” said Pickel.

Dealers 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, and 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.

The CFTC staff recommendations are likely to require that when a foreign entity transacts in more than a de minimis level of U.S. facing swap dealing activity, the entity would register under the CFTC’s recently completed swap dealer registration rules.

The recommendations will address transactions not only with persons or entities operating in the United States, but also with their overseas branches.

“In the midst of a default or a crisis, there is no satisfactory way to really separate the risk of a bank and its branches,” CFTC chairman Gary Gensler said in Congressional testimony on May 22. “Likewise, I believe this must include transactions with overseas affiliates that are guaranteed by a U.S. entity, as well as the overseas affiliates operating as conduits for a U.S. entity’s swap activity.”

The recommendations will include a tiered approach for requirements for overseas swap dealers. Some requirements would be considered entity-level, such as for capital, risk management and recordkeeping. Such entity-level requirements would apply to all registered swap dealers, but in certain circumstances, overseas swap dealers could comply with these requirements through substituted compliance.

Other requirements would be considered transaction-level, such as clearing, margin, real-time public reporting, trade execution and sales practices.

Both entity-level and transaction-level requirements would apply to all registered swap dealers, but in certain circumstances, overseas swap dealers could comply with these requirements through substituted compliance.

Banks say that 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.

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