The CFTC issued an interpretative statement as to the conditions under which information held by a Swap Data Repository could be accessed by a non-U.S. government. The statement exempts foreign regulators from either entering into a confidentiality agreement relating to such data or from agreeing to any indemnity in connection with any litigation relating to the data. Under the guidance, non-U.S. regulators can “access data in which they have an independent and sufficient regulatory interest, even if that data also has been reported pursuant to the CEA and Commission regulations.” In order to access such data, the foreign regulator would have to have “oversight responsibilities” for the SDR in the foreign jurisdiction, but the SDR would not necessarily have to be “registered” in the foreign jurisdiction.
The interpretation was issued by a 3-2 vote, with Commissioners Sommers and O’Malia dissenting. One of the points made in the dissent is that the interpretative statement actually provides non-U.S. regulators with easier access to the relevant data than it does to U.S. regulators generally.
Lofchie Comment: According to the statement by CFTC Chairman Gensler, this interpretation gives non-U.S. regulators potential “unfettered access” to trading information held by an SDR in light of the “traditions of mutual trust and cooperation among international regulators.” It would seem that, without stretching its authority, a non-U.S. regulator could obtain information as to any transaction involving any party which had a connection with the relevant non-U.S. jurisdiction or that was trading in a commodity or asset (e.g., energy) in which the non-U.S. jurisdiction had an interest. This interpretation may be controversial, as various U.S. parties may believe that either they or the U.S. generally has an interest in imposing greater procedural restrictions on access to U.S. transactions by non-U.S. regulators.
Cross-Reference(s): Commodity Exchange Act Sec. 21(d) [Swap Data Repositories].
CFTC Division of Clearing and Risk staff issued an interpretation providing clarification that CFTC Rule 22.2(d) does not prohibit a customer from granting a lien on the account at the FCM, nor does it prohibit the FCM from allowing or facilitating the lien.
Lofchie Comment: The interpretation is very significant as it will allow the cross-margining, at least for risk purposes, of cleared swap accounts with other accounts at the same or affiliated financial institutions. Of course, as margin requirements are not integrated between regulators, customers will still have to post margin amounts that satisfy CFTC, SEC and any bank regulatory requirements.
Further to the regulation on short selling and certain aspects of credit default swaps, which is due to become effective on November 1st, the European Securities and Markets Authority has published an indicative list of thresholds applicable to sovereign issuers for the purposes of notification to competent authorities of significant net short positions in sovereign debt. The finalized thresholds will be published by November 1, 2012. Interested entities that may hold notifiable short positions should check for regular updates of the table.
Lofchie Comment: The question for US advisers and funds will be as how this, as well as the other EU short selling and position requirements, applies to them.
George Osborne (UK Chancellor of the Exchequer), Michel Barnier (European Commissioner for Internal Market and Services), Ikko Nakatsuka (Government of Japan Minister of State for Financial Services) and Pierre Moscovici (Government of France Minister of Finance) submitted a joint letter to CFTC Chairman Gensler expressing concern as to the CFTC’s cross-border swaps rules. The gist of the letter is to the effect that the CFTC must recognize compliance by non-U.S. firms with non-U.S. rules as satisfying U.S. requirements.
Lofchie Comment: This is an understated letter to the CFTC saying that the CFTC’s cross-border rules do not work, and that they should not be adopted until harmonized with the rules of non-U.S. regulators and that the CFTC’s final rules must recognize that non-U.S. firms should be deemed to have complied with any U.S. rules by virtue of compliance with home-country rules. In earlier letters, the non-U.S. regulators had sounded a harsher tone, albeit with the same message: the CFTC needs to back off on regulation of non-U.S. swaps dealers.
As I have previously stated, I simply do not see how the CFTC can disregard these non-U.S. regulators. If the CFTC does not acknowledge them, the CFTC must be prepared for the possibility (certainty?) that the non-U.S. regulators will respond in kind to the CFTC and subject U.S. swap dealers to full double regulation abroad.
On the other hand, I think that the CFTC is likely stuck between a rock and a hard place in that the CFTC’s proposed regulation of U.S. swaps dealers is so burdensome that I suspect that any non-U.S. firm able to avoid such regulation will have a great competitive advantage over U.S. firms. In short, if the CFTC is to recognize that compliance with non-U.S. regulation constitutes compliance with U.S. regulation, I think that the CFTC will have to (or at least should) rethink the burdens it has imposed on U.S. firms.
The fact that this letter is directed solely at the CFTC, and not at the SEC, further emphasizes the difference in the approaches that the two agencies have taken to cross-border regulation, with the SEC seeming to be much more concerned with seeking input from non-U.S. regulators. Compare, by way of example, this speech by SEC Commissioner Walter with this speech by CFTC Commissioner Chilton.
The FDIC issued a final rule that implements a part of the Dodd-Frank Act which permits the FDIC, as receiver for a financial company whose failure would pose a significant risk to the financial stability of the United States (a ‘‘covered financial company’’), to enforce contracts of subsidiaries or affiliates of the covered financial company, despite contract clauses that purport to terminate, accelerate or provide for other remedies based on the insolvency, financial condition or receivership of the covered financial company. As a condition to maintaining these subsidiary or affiliate contracts in full force and effect, the corporation as receiver must either:
- transfer any supporting obligations of the covered financial company that back the obligations of the subsidiary or affiliate under the contract (along with all assets and liabilities that relate to those supporting obligations) to a bridge financial company or qualified third-party transferee by the statutory one-business-day deadline; or
- provide adequate protection to such contract counterparties.
The final rule sets forth the scope and effect of the authority granted under the Dodd-Frank Act, clarifies the conditions and requirements applicable to the receiver, addresses requirements for notice to certain affected counterparties, and defines key terms.
Effective Date: November 15, 2012.
Cross-Reference(s): Dodd-Frank Section 210 (Powers and duties of the Corporation).
The SEC voted unanimously to propose capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants in order to regulate the over-the-counter swaps markets, as required by Dodd-Frank.
The SEC’s proposed rules are intended to accomplish the following:
- Set minimum capital requirements for security-based swap dealers and major security-based swap participants.
- Establish margin requirements for security-based swap dealers and major security-based swap participants with respect to non-cleared security-based swaps.
- Establish segregation requirements for security-based swap dealers and notification requirements with respect to segregation for security-based swap dealers and major security-based swap participants.
The attached materials provide some basics as to the rule proposals. One interesting question posed in the summary materials below is whether dealers should be required to post initial margin to each other.
Lofchie Comment: I have not yet seen the full release and thus I don’t feel that any comment on the substance of the rule proposal would add that much to the SEC’s attached fact sheet. There is not enough detail in the fact sheets for me to tell how the rules apply to swaps involving illiquids or products such as variance/volatity/dividend swaps. The next two news stories provide the statements of various of the SEC Commissioners. I think some of what Chairman Schapiro says is particularly interesting, but again the detail is limited. (You should definitely check out the graphic prepared by the SEC for the event to show off its progress on swaps rulemaking (its linked from the box below and its very cute.)
In Chairman Schapiro’s opening statement, she provided some high-level background as to the SEC’s proposed new rules that would establish capital, margin, and segregation for security-based swap dealers and major security-based swap participants. She noted that the new rules were intended to be modeled after the SEC’s existing capital rules, but conceded that a lack of experience in establishing capital regulation as to swaps made this an inherently uncertain exercise. Chairman Schapiro notes that these proposals place heavy importance on requiring security-based swap dealers to hold liquid assets that are “readily available in times of crisis, given that security-based swap dealers regulated by the Commission, unlike dealers that are banks, will not have access to certain sources of bank funding.”
Commissioner Gallagher further noted that these rules are a part of the ongoing U.S. and international process, in keeping with the CFTC’s proposed capital and margin requirements (and segregation requirements) for non-bank registrants, and the prudential regulators’ proposed capital and margin requirements for bank registrants.
Lofchie Comment: In tone and style at least, the SEC and the CFTC have taken very different approaches to their rulemaking. Both SEC Commissioners invite comment from market participants and other regulators; in this regard, Commissioner Gallagher describes the SEC’s rule proposal as “add[ing the SEC’s] voice to an ongoing conversation” on regulatory issues. By contrast, the CFTC has taken a more self-assured attitude in its rule making, even as to non-U.S. regulators, as reflected in Commissioner Chilton’s recent speech in which he urged non-U.S. regulators to catch up to the CFTC.
One very significant concern, and I think a very valid one, that SEC Chairman Schapiro raises is that because broker-dealers (and other non-bank dealers) do not have access to the same sources of funds as to which banks have access in times of crisis (implicitly, the Fed Window), the SEC must be more cautious in establishing capital and margin requirements; i.e., they must be higher. It thus follows that these higher capital and margin requirements will make it more expensive to trade. I really wonder if this is a good result for the U.S. financial system. Given that most swaps are in large part financing transactions, does it really make sense to force these trades out of banks (which are the logical sources of financing) into other entities? Further, when U.S.-based swaps dealers are competing abroad for business against non-U.S. banks, won’t U.S. firms be at a significant competitive disadvantage? In any case, the decision to force swap dealer activities out of banks is not the SEC’s decision; and, once that decision is made, Chairman’s Schapiro’s concern makes fundamental sense. But it follows that those firms that thought that Dodd-Frank would result in a reduction in trading costs may be disappointed as any such gain, if there is one, will be likely (fully, partially, or more than?) offset by the direct and indirect costs of capital and margin.
SEC Commissioner Luis A. Aguilar delivered a speech in which he expressed support for the proposal as seeking to achieve four broad goals. These goals are as set out below:
- The rules would augment the financial stability of nonbank security-based swap dealers and nonbank major security-based swap participants by setting minimum capital requirements for these entities, and by imposing minimum liquidity requirements on those dealers that calculate net capital using models.
The rules seek to prevent the build-up of large, AIG-style, uncollateralized exposures in uncleared security-based swaps by imposing margin requirements for transactions in these instruments.
The rules seek to protect counterparties of security-based swap dealers by setting requirements for the segregation of excess securities collateral and net funds owed to the counterparties, so that this property can be identified and returned to the counterparties in the event a dealer goes bust.
The rules would enhance the future financial stability of “alternative net capital” firms by substantially increasing the minimum dollar amounts of required net capital and tentative net capital and by imposing minimum liquidity requirements.
Financial Services Committee Chairman Spencer Bachus today announced the release of new House report: “The Dodd-Frank Act, the Persistence of ‘Too Big to Fail,’ and the Institutionalization of Government Bailouts.” The seven-page analysis makes an argument against claims made by Dodd-Frank supporters that the 2,300-page law ends “too big to fail.”
Lofchie Comment: I thought the brief point made as to the Resolution Authority was pretty good (at least it confirmed my view that so-called “orderly liquidiation” in the manner contemplated by Dodd-Frank, can not possibly work in real life.
SEC Chief Economist and Director Craig M. Lewis delivered a speech about economic analysis in support of Commission rulemakings. Lewis paid particular attention to the role of economists from the Division of Risk, Strategy, and Financial Innovation (“RSFI”), and the recently issued guidance on economic analysis. In his speech, Lewis provided an overview of the major topics within The Guidance (i.e., a document providing a high-level approach to economic analysis, drawing on concepts from various sources, including guidance issued by the Office of Management and Budget, congressional correspondence, etc.), which was circulated to rule-making Divisions and Offices of the Commission.
In Lewis’s perspective, The Guidance reflects a common-sense approach to being thoughtful and transparent about economic analysis, including the potential impacts and trade-offs of the regulatory decisions that the Commission is making. The four basic elements of a robust economic analysis, according to the document, are: (i) identifying the need for the regulatory action; (ii) defining the baseline against which to measure the economic effects of that regulatory action; (iii) identifying alternative regulatory approaches; and (iv) an evaluation of the benefits and costs of the regulatory action and the principal regulatory alternatives, both quantitative and qualitative. Lewis argues that the above principles will provide substantive elements of a robust economic analysis.
Lofchie Comment: Leaving aside any arguments as to how the SEC might come out on a specific issue, this is the very direction that one so wishes U.S. financial regulation would take: law informed by economics, not indifferent to it (or ignoring it as inconvenient). I just hope that the Office operates in a manner that allows input and clashing opinions from outside sources. It’s nice to have some positive regulatory direction.