CFTC Commissioner Sommers Supports Wetjen, Democratic Senators Caution Gensler (with Lofchie Comment)

CFTC Commissioner Jill Sommers released a statement supporting Commissioner Wetjen's proposal of an interim final guidance that would be based on industry and public feedback, after Chairman Gensler had criticized the idea of delaying cross-border rules at a Senate Appropriations hearing. Commissioner Sommers expressed her support for Commissioner Wetjen, and her general disagreement with Chairman Gensler by stating, "No one has ever accused Gary Gensler of being reasonable, but Commissioner Wetjen has put a reasonable proposal [for delay of the cross-border rules] on the table that would achieve multiple goals."

A number of newspapers also reported that six Democratic Senators had urged CFTC Chairman Gensler to delay the application of the CFTC's cross-border rules.

Lofchie Comment: The criticism of Chairman Gensler, and the request from the various Senators, comes in reaction to a number of his statements as to cross-border regulation, most particularly (i) his published statement on the imposition on cross-border regulation (linked below) and (ii) his responses to questions before the subcommittee of the Senate Appropriations Committee (also linked below), in each case indicating that he planned to push for final cross-border rules by July 12.

(For those interested in viewing the remarks by Chairman Gensler that triggered Commissioner Sommers' disdain, the most significant aspects of Chairman Gensler's responses to questioning from the Senators is approximately 1:35 to 1:45 into the video of the hearing (linked below) in response to Senator Johanns.) Immediately following Chairman Gensler's responses to Johanns' questions as to why the CFTC is seeking to adopt crossborder rules by July 12, SEC Chairman White stated that the SEC would move in a more deliberate fashion than the CFTC and would consider public comments on its proposed rulemaking.)

Notwithstanding Chairman Gensler's desire to have rules by July 12, there were a number of aspects of Chairman Gensler's responses to questions from the Senators on cross-border regulation that emphasized how significant the uncertainty is in this area, and which argue for the prudence of a formal rule making process. Three examples of this very significant uncertainty are provided below:

One, Chairman Gensler stated that the CFTC was open to a program of substituted compliance by non-U.S. financial institutions, yet at the same time indicated that no other jurisdiction had in place a comprehensive scheme of regulation that would justify substituted compliance. Taking these two aspects of his remarks together, one was left with the impression that the Chairman would not accept substituted compliance when the CFTC's current exemptive order expires on July 12, although he did not say so directly. Does that mean that Chairman Gensler believes that all non-U.S. firms registered as swap dealers should be subject to the full range of U.S. regulation, at least for the intermediate future?

Two, as to Canada, the Chairman indicated that only two of the provinces had schemes of regulation for derivatives and the other provinces did not. Given that the major Canadian banks operate in more than one province, does that mean that the CFTC intends to regulate the major Canadian banks extensively for the long term?

Three, Chairman Gensler indicated that non-U.S. funds with U.S. advisers should be treated as U.S. persons under Dodd-Frank. He did not indicate whether that would include funds with non-U.S. ownership or how funds with a mix of U.S. and non-U.S. ownership should be treated. Nor did he indicate whether he would accept European jurisdiction over funds with European advisers, if such funds had some degree of U.S. ownership. In other words, how does the CFTC intend to resolve with Europe the issue of regulatory citizenship where an entity has some links to both the United States and Europe?

The existence of these uncertainties argues for the CFTC not to impose a blackbox of cross-border rules on global markets on July 12, but rather to follow the SEC's course in proposing a full cross-border rule, which would be published in the Federal Register, and available for comment.

See: Bloomberg Coverage of Sommers Statement and Senators' Letter.
See also:Chairman Gary Gensler's Testimony before the U.S. Senate Appropriations Subcommittee on Financial Services and General Government; Chairman Gensler's Responses to Questions before the Senate; Chairman Gensler on International Swaps Market Reform (with Lofchie Comment).