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Global coordination of capital market regulations and data requirements - Resilience of the EU financial sector in the global context

Coordinated regulatory reform needed to avoid market balkanization

By Giancarlo Christopher - Commissioner, U.S. Commodity Futures Trading Commission (CFTC)


The following remarks reflect my own views and not necessarily the views of the CFTC. In the post-crisis era of weak economic growth, the international community of financial regulators must coordinate their efforts to enhance the safety, durability and vibrancy of global marketplaces for swaps and derivatives.

The CFTC has a long history of working collaboratively with foreign regulators to facilitate cross-border business. One prominent example is the 1996 “no-action” process created by the CFTC to permit direct access by U.S. customers to foreign boards of trade (FBOTs). In 2011, pursuant to authority granted by the Dodd-Frank Act, the CFTC adopted rules providing for the registration of FBOTs with the CFTC based on substituted compliance with a foreign regulatory regime. As with the previous no-action process, in determining the comparability of a foreign regulatory regime under the rules, the CFTC does not engage in a “line-by-line” examination of a foreign regulator’s approach to supervising the FBOT it regulates. Rather, it conducts a principles-based review to determine whether a foreign regime supports and enforces regulatory oversight of the FBOT.

Unfortunately, over the past few years, the CFTC has departed from such principles-based comparability determinations when it comes to cross-border swaps activity. In 2013, the CFTC published its “Interpretive Guidance and Policy Statement” (Guidance) in which it described how it intended to apply U.S. law to non-U.S. entities. Although the Guidance permits substituted compliance in certain circumstances, the manner in which the CFTC has implemented its substituted compliance determinations under the Guidance has been, in my view, unduly restrictive. In essence, the Guidance asserted that every single swap a U.S. Person enters into, no matter where it is transacted, has a direct and significant connection with activities in, and effect on, commerce of the United States that requires imposing CFTC transaction rules.

The CFTC has a long history of working collaboratively with foreign regulators.

After issuing the Guidance, the CFTC received requests from six non-U.S. jurisdictions with U.S.-registered swap dealers asking for comparability assessments. The Commission stated that it would make its determinations on a “requirement-by-requirement” basis, rather than considering the foreign regulatory framework and characterized its approach as “outcome-based.” Under this approach, the foreign jurisdiction’s requirements need not be identical to the CFTC’s as long as they achieve the regulatory outcome sought to be achieved by the CFTC.

In practice, however, the CFTC conducted a granular rule-by-rule comparison of each CFTC regulatory requirement and each foreign regulatory requirement. The conclusions derived from this process resulted in a patchwork of determinations in which substituted compliance was found appropriate for some rules, but not for others. Former CFTC Commissioner Scott O’Malia observed that this methodology was contrary to understandings reached by the OTC Derivatives Regulators Group that a flexible, outcomes-based approach should form the basis of assessments regarding substituted compliance. I wholeheartedly agree.

The recent equivalence agreement between the U.S. and Europe for central counterparty clearing was delayed and made more complex because both the European Commission (EC) and CFTC essentially held each other’s regulatory text up to the ceiling light to determine if the words and font sizes were identical. This line-by-line rule analysis is contrary to the OTC Derivatives Regulators Group approach, which states that a flexible, outcomes-based approach, based on a broad category-by-category analysis, should form the basis of equivalence or substituted compliance.

With respect to future regulations borne out of the financial crisis, the EC and CFTC must work together to implement an equivalence and substituted compliance process based on common principles in order to increase regulatory harmonization and reduce market balkanization. Failure to cooperate will only prolong the “new mediocre” of sluggish economic growth, diminished global trade and stagnant living standards that have become the sad legacy of the post-crisis era.