CFTC Chair Proposes Alternative Cross-Border Framework
Commentary by Steven Lofchie
CFTC Chair J. Christopher Giancarlo proposed an alternative cross-border swaps framework to "better balance systemic risk mitigation with healthy swaps market activity in support of broad-based economic growth."
In a new white paper, he previewed weeks ago, Mr. Giancarlo outlined his views on the current CFTC approach to regulating cross-border activities and suggested a new approach that would encourage greater cooperation with non-U.S. jurisdictions. Mr. Giancarlo recommended, among other things:
- Non-U.S. Central Clearing Parties ("CCPs"): expanding the use of the CFTC's exemptive authority for non-U.S. CCPs that are subject to similar regulations in their home country and do not pose risk to the U.S. financial system;
- Non-U.S. trading venues: terminating the bifurcation of the global swaps market into separate U.S. person and non-U.S. person marketplaces by exempting non-U.S. trading venues, in regulatory jurisdictions that have adopted similar G20 swaps reform, from having to register with the CFTC as swap execution facilities;
- Non-U.S. swap dealers: regulating non-U.S. swap dealers whose swap-dealing activity poses a material risk to the U.S. financial system;
- Clearing and trade execution requirements: allowing non-U.S. persons to rely on substituted compliance as to swap clearing and trade execution requirements in comparable jurisdictions; and
- Arrange, negotiate, or execute swap transactions: taking a "territorial approach to the U.S. swaps trading activity," as non-incidental swaps trading activity in the United States should be subject to U.S. swaps trading rules.
Commentary
Market participants should be aware that while Chair Giancarlo is, in many respects, advocating for less U.S. regulation, and more deferences to home country regulators, he is not advocating for a deregulatory approach. In fact, in a number of regards, he would expand the scope of U.S. swaps regulation, perhaps most significantly as to swaps that are "arranged, negotiated or executed" in the United States by non-U.S. swap dealers. It is not clear what additional steps he would take in regard to the regulation of non-U.S. swap dealers whose activity pose a material risk to the U.S. financial system (or by what criteria he would determine which swap dealers posed such a risk). Beyond the substance of what Chair Giancarlo is proposing, what is really fascinating is the manner in which he is pushing the direction of the CFTC, and how he prepared for that push even while being a Commissioner in the minority party; that is, through the publication of white papers, he has established himself as an intellectual and thought leader for the direction of regulation. This has not only established his acumen – he has also freed himself from the constraints of the bureaucratic process. There are probably not too many other regulators who would be able to exert influence in this manner, but one possibility is SEC Commissioner Peirce.