In 2013, the Commodity Futures Trading Commission (CFTC) unveiled its cross-border guidance, which set out how it intended to apply US rules in foreign jurisdictions. The commission debated the meaning of a “direct and significant” impact to the US economy in order to justify a broad international application of CFTC rules. As a commissioner at that time, I made my views about the agency’s guidance very clear. I felt it went well beyond the limits set by Congress by indiscriminately exporting CFTC rules overseas with insufficient weight given to principles of international comity, creating duplication and inconsistencies in rule sets. Seven years on, the CFTC recently opted for a different approach – one that will defer to a much greater extent to foreign regulators and reduce the prospect of overseas swaps activity being subject to CFTC oversight unless it poses a material risk to the US.
The collaborative attitude to overseas regimes is extremely welcome. The CFTC’s new cross-border rules introduce a broader, more holistic approach to determining the comparability of a foreign jurisdiction’s rules, based on overall outcomes rather than whether each individual requirement is identical. ISDA has long called for such a risk-based approach, which we think will make the substituted compliance process much less onerous and time-consuming, and will contribute to less duplication and unnecessary burdens for market participants.
Another big change is the decision to withdraw the so-called ‘arrange, negotiate and execute’ (ANE) rule for those requirements covered by the new cross-border framework. Introduced in late 2013 and subject to successive no-action relief ever since, the ANE rule meant any transaction between a non-US swap dealer and a non-US entity would be subject to CFTC oversight if any US person was involved in organizing the trade, irrespective of where the risk resides – an egregious expansion of the CFTC’s reach outside the US.
Combined with the introduction of a simpler, less extensive US person definition that aligns with that of the Securities and Exchange Commission, the CFTC has settled on a cross-border framework that will reduce complexity for derivatives participants. Most importantly, the changes essentially recognize there’s a subset of derivatives activity currently captured by the 2013 guidance that has limited nexus to the US, and it may be more appropriate for that activity to be overseen by foreign regulators if their rules are broadly comparable. That’s a big change in mindset.
It is important to point out that the new cross-border rules only apply to certain Dodd-Frank Title VII requirements, including documentation standards, risk mitigation and external business conduct requirements. They don’t cover reporting, clearing or trade execution rules – meaning market participants face having to having to comply with two different frameworks with two different definitions of US person. We urge the CFTC to expand the new rules to the other requirements of the Dodd-Frank Act as soon as possible to minimize the hefty compliance burden this creates.
The rules also unnecessarily impose a bifurcated approach to obtaining counterparty representations to confirm their US person or guarantee status. For existing counterparty relationships, firms can continue to rely on current counterparty representations based on the cross-border guidance until the end of 2027. For counterparty relationships entered into after the effective date of the rules (60 days after publication in the Federal Register), new representations based on the revised definitions must be obtained, giving derivatives users and third-party service providers insufficient time to make the necessary changes to their systems.
To ease the compliance burden and allow for an appropriately phased implementation period, we believe firms should have until the compliance date (365 days after publication in the Federal Register) to prepare for the new representations. Providing this relief will not be detrimental to the CFTC’s regulatory oversight: existing counterparty representations are based on the broader definition of US person and guarantee contained in the guidance, potentially capturing more firms than would be the case under the new regime.
The new rules represent a step forward in how cross-border transactions will be regulated. By reining back the previous guidance, the CFTC has recognized it doesn’t have the capacity to police the entire swaps universe and instead should develop a more sustainable and collaborative approach to working with other jurisdictions that have comparable rules in place. We should now turn to securing comparability determinations to minimize the potential for duplication, inconsistency and regulatory retaliation, and ensure the derivatives market remains safe and efficient. For our part, ISDA will work with members to help implement the rules, identify areas where similarities exist between rule sets, and take advantage of new eligibility requirements to initiate comparability determinations where appropriate.
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