CFTC Chairman Wetjen Speaks about Regulatory Regime for Global Derivatives Markets (with Lofchie Comment)

CFTC Acting Chairman Wetjen spoke at the International Futures Industry Conference discussing the need for a harmonized regulatory regime for global derivatives markets. Chairman Wetjen stated that, in order to achieve a harmonized regulatory regime, regulation must (i) "always be cognizant of reality" and (ii) be appropriately harmonized across legal jurisdictions. He went on to state: "The paramount objectives of derivatives regulations must be to support a global market structure that promotes open, transparent, and liquid markets and sound risk-management practices at the firms operating within those markets." Chairman Wetjen explained that global execution and clearing services should be open to U.S. persons, "provided the trading venues offering such services . . . are appropriately overseen by home regulators and remain subject to regulations that are comparable to, and as comprehensive as, U.S. law." He argued further that this comparability standard incentivizes foreign jurisdictions to "harmonize their risk management, reporting, clearing, and execution standards with U.S. standards under Dodd-Frank," and, over time, to better align the interests of firms operating in various jurisdictions with the regulatory interests of foreign regulators. Chairman Wetjen expressed his confidence that "an expanded comparability framework for global execution and clearing venues will translate, over time, into more competition and more "open, transparent, and liquid derivatives markets."Additionally, Chairman Wetjen encouraged foreign regulators to remain "faithful" to the outcomes-based approach described in the CFTC's cross-border guidance. He stated that the CFTC staff is developing regulations to set forth a process for recognizing foreign clearinghouses and trading venues. These new regulations, he noted, will assist in pursing more "open, transparent, and liquid derivatives markets." In closing, he declared that the CFTC will continue to promote harmonized regulation, doing what it can to avoid incentivizing personnel decisions, inter-affiliate relationships and corporate structures that will only make financial firms more difficult to manage, understand and unwind during a period of market distress.

Lofchie Comment: By his remarks, Commissioner Wetjen may be developing the groundwork for revisiting the cross-border "guidance" promulgated under former the former CFTC Chairman. While this is a good development, it is still important to question fundamental principles underlying Dodd-Frank. For example, it is not beyond dispute that centralized clearing reduces risk. If the U.S. regulators believe that the centralized clearing of certain products can reduce risk in the U.S. markets, it ought not follow that non-U.S. regulators should be obligated to reach the same conclusion.Further, as we previously observed, both buy-side and sell-side market participants seem to find the U.S. regulatory approach unattractive (see related item in today's news). This should give the U.S. regulators some pause before they seek to impose the U.S. regulatory framework globally.

See: Commissioner Wetjen's Speech.Related news: Commissioner Piwowar Speaks about International Financial Regulatory Issues (with Lofchie Comment) (March 6, 2014); CFTC and Financial Services Agency of Japan Sign MOC to Enhance Supervision of Cross-Border Regulated Entities (March 10, 2014); CFTC Holds Global Markets Advisory Committee Meeting (with Robins Comment and Delta Strategy Group Summary) (February 13, 2014); Chamber of Commerce Submits Amicus Brief Regarding Lawsuit against CFTC Cross-Border Rule (with Zwirb Comment) (February 4, 2014).