IIB Final Comment Letter on CFTC Further Proposed Cross-Border Guidance (with TWO Lofchie Comments)
The Institute of International Bankers ("IIB") has published a comment letter in which it offers suggestions across three key topics: (i) the aggregation rule, (ii) the “U.S. person” definition, and (iii) matters relating to the transition from the Final Order.In the letter, the IIB states that it supports the CFTC's adoption of a modified version of the Final Exemptive Order Regarding Compliance with Certain Swap Regulations (78 FR 858), which it believes addresses two key elements of the Title VII regulatory regime:
- the aggregation of affiliates' swaps for purposes of the de minimis exception from the swap dealer definition, and
- the definition of "U.S. person."
The IIB suggests, however, that additional modifications are necessary to respond to comments received by the CFTC on the Proposed Guidance and "facilitate good faith compliance with Dodd-Frank." In particular, the IIB requests that the CFTC reexamine the policy of its aggregation requirements (that is, that affiliated entities aggregate their swaps activities for purposes of determining whether swaps registration will be required), as IIB believes that many firms which do a very limited swap business may be either drawn into the dealer registration requirement or forced to stop doing business with U.S. customers.
Quite a bit of the letter discusses some of the broad definition of "U.S. person" set forth in earlier CFTC guidance, and explains why such such a broad definition would be problematic for both non-U.S. market participants and non-U.S. regulators.
Lofchie Comment 1: The difficulty with commenting on the CFTC's proposed definition of "U.S. person" is that the CFTC has issued at least three quite inconsistent definitions with no explanation of the policy rationale behind them, nor any explanation of how the CFTC intends to coordinate with non-U.S. regulators under any of the definitions. The proposal that the IIB praises has the benefit of being the narrowest and simplest of the various definitions. The CFTC, however, gives no indication of whether it is tending to adopt such a definition, or has simply thrown out a narrow definition as a stop gap measure. Presumably, this would be to avoid confronting the fact that the rest of the world has no idea what the CFTC intends to assert in the way of global jurisdiction.
Lofchie Comment 2L The argument in the IIB letter raising the greatest concern is the statement that non-U.S. market participants simply do not want to enter into the agreements that U.S. dealers require in order to comply with Dodd-Frank.
Dodd-Frank is not drawing financial business to the United States from foreign investors who want the safety of the U.S. markets. It is the opposite: Dodd-Frank is scaring financial business out of the United States because foreign investors do not want to deal with the complexity, burdens, cost and confusion of U.S. regulation. This observation by the IIB is consistent with a comment I made in arecent newsletter as to the results of a trip I had made to advise clients in Hong Kong. Non-U.S. commercial and financial customers would rather forego transacting with U.S. firms than become subject to Dodd-Frank. This result cannot be anything other than destructive for the U.S. economy and damaging to the (critical?) place of the U.S. in the world economy.
My concerns can be tested. If the regulators are trying to make U.S. markets attractive to foreign investors, they should simply hire a private marketing firm to poll non-U.S. investors and ask whether Dodd-Frank makes them more or less likely to trade with U.S. financial institutions. If the answer is that they are less likely, then the regulators should ask themselves why rules intended to make market participants safer are instead having the effect of driving them away.
Click here to view letter in full (links externally to IIB website).
See also: Further Proposed Guidance Regarding Compliance with Certain Swap Regulations (CFTC - Fed. Reg. Version).See also: CFTC Approves Exemptive Order on Cross-Border Application of the Swaps Provisions of Dodd-Frank (Fed. Reg. Version).