SIFMA and ISDA Submit Comments on Cost Benefit Analysis in Response to CFTC Request
Commentary by Bob Zwirb and Steven Lofchie
SIFMA and ISDA responded to the CFTC's request for comments in its initial response to the order of the United States District Court for the District of Columbia in SIFMA v. CFTC. The order remanded eight swaps-related rulemakings by the CFTC to address "inadequacies" in the Commission's consideration of costs and benefits.
In its initial response, the CFTC issued supplements formally to the preambles of the eight remanded swaps-related rulemakings and solicited comments on the cross-border costs and benefits that apply to the remanded rules and that differ from those that apply to activities within the United States.
According to SIFMA and ISDA, many cross-border challenges to the swaps market exist because of the CFTC's "nearly exclusive focus on the domestic effects of its rules and the limited scope and restrictive application of its substituted compliance mechanism." SIFMA and ISDA stated that simply redeploying the CFTC's previous and "apparently domestic" cost-benefit analysis "will yield no new information, distill no lessons from the experience" and "miss a valuable opportunity to contribute to the global discussion regarding resolution of cross-border issues."
SIFMA and ISDA stated that an in-depth discussion of the differential effects between the domestic and overseas application of swaps rules is needed in order to "make headway" in realizing the G-20 swaps mandate and advancing CFTC Chair Massad's priority of regulatory harmonization.
SIFMA and ISDA also cautioned against an "overly narrow conception of the burdens resulting from extraterritorial application" of the CFTC's rules. According to SIFMA and ISDA, the costs of an extraterritorial application of these rules, both directly and "stemming from their market impact," must be weighed against the "minimal benefits" accruing from overlaying CFTC rules onto foreign regulations that meet the objectives outlined by the G-20 jurisdictions.
SIFMA and ISDA described specific examples of cost-benefit considerations and urged the CFTC to analyze each remanded rulemaking with those considerations in mind.
See: SIFMA and ISDA Comment Letter.
Related news: CFTC Chair Massad Testifies before European Parliament in Brussels on Futures Margin and Global Harmonization (May 6, 2015); CFTC Issues Supplements to Swaps-Related Rulemaking to Clarify Costs and Benefits; Requests Comments (Fed. Reg.) (with Lofchie and Zwirb Comments) (March 10, 2015); D.C. District Court Issues Opinion on SIFMA v. CFTC Cross-Border Guidance Case (with Lofchie and Zwirb Comments) (September 16, 2014).
Commentary
SIFMA and ISDA are performing a public service by cautioning against an "overly narrow conception of the burdens resulting from extraterritorial application" of CFTC rules. In doing so, they highlight the difference between a narrow approach to cost-benefit analysis and a more thorough one. An example of the latter approach appears on page 2 of the comment letter, where SIFMA and ISDA note that the burdens of applying the CFTC standard abroad involve more than registration fees, NFA membership dues and expenses to construct and administer compliance systems, and go on to discuss the formidable qualitative costs – including those of the market impact – of such application:
"When foreign market participants are subject to Commission rules, they must engage with an unfamiliar, non-domestic regulator and face uncertainty regarding the ramifications of being subject to a new regime. A full-bore legal investigation (which may leave unresolved issues) and substantial management attention are prerequisites in any responsible entity to becoming subject to a foreign regulator. The addition of specially trained staff is a common adjunct. Internal conflicts and customer resistance frequently may follow. It is unsurprising that non-U.S. market participants simply may be unwilling to take on this burden. These costs and uncertainties function as barriers to entry and to continued engagement in U.S. markets, potentially resulting in market fragmentation and decreased liquidity available to U.S. persons as foreign market participants change their business practices so as not to subject themselves to Commission regulation. This situation inevitably makes it more expensive for end users to hedge."
Although it might be premature to forecast the outcome, one should keep in mind that the federal district court judge who remanded this case back to the CFTC for failing to conduct any cost-benefit analysis has broadcast (arguably) his intended decision by stating that the standard to which, in his view, the law holds the CFTC "is not particularly demanding." SIFMA v. CFTC, Civil Action No. 13-1916 (D.D.C., 2014). One would hope that the CFTC will take this obligation more seriously this time. As Hester Peirce of the Mercatus Institute notes, "[t]he danger of [a] legal check-the-box approach [to cost-benefit analysis] is that the CFTC will lose the insights that economists can bring to the analysis." H. Peirce, "Economic Analysis by Federal Financial Regulators, Working Paper 12-31," Mercatus Center. Oct. 2012.
Commentary
The District Court's original opinion in favor of the CFTC was not persuasive. See D.C. District Court Issues Opinion on SIFMA v. CFTC Cross-Border Guidance Case (with Lofchie and Zwirb Comments) (September 16, 2014). A second read shows that that decision is still too gentle. Perhaps by making their case in comments before a wider forum, the parties will effect some long-term benefit.