The Alternative Investment Management Association (“AIMA”) released a paper that highlights the key areas where deeper coordination of over-the-counter (“OTC”) derivatives regulation is required to achieve the G20 objective of maintaining global markets.
At one level, this is a general statement that the various national regulators should work together to coordinate their activities. However, on a more specific level, the paper is directed primarily at the CFTC. Here are some of the key sentences in this regard:
“The CFTC Cross Border Guidance has been the subject of substantial comment and concern from non-US institutions and governments.”
“[S]ignificant questions remain [as to the CFTC’s cross-border policy], including the treatment of funds and similar entities as US persons and the application of CFTC rules to such entities or the transactions into which they enter.”
“With limited exceptions, the CFTC has not proposed to allow substituted compliance with respect to the clearing obligation in a transaction between a US person and an EU counterparty.”
“In our submissions to the CFTC on the CFTC Cross Border Guidance as well as the CFTC’s further proposed guidance on cross-border issues, we recommended that the US authorities should, in tandem with other jurisdictions, defer to the mechanism of jurisdiction-level equivalence for resolving situations of conflict or overlap, rather than using either the requirement-by-requirement form of substituted compliance it has proposed or ad hoc no-action relief for individual requirements. Substituted compliance should apply to all US swap requirements, including Transaction-Level Requirements. In addition, we would respectfully submit that the CFTC should use broad-based criteria in making any determinations required as part of implementing a substituted compliance framework. Given that the reform of the OTC derivatives market stems from a G20-level agreement, we believe that substituted compliance should be broadly construed, rather than based on one-to-one correspondence of specific requirements.”
Lofchie Comment: Nearly three years after the adoption of Dodd-Frank, no one really has any idea what the CFTC’s intended direction is as to the cross-border application of its rules. Its initial proposals have been met with global resistance from market participants and, much more significantly, from financial regulators around the world, and the CFTC has given some indication that it will modify its position in response to this resistance. But we do not have any specifics as to what this modification will entail. From the standpoint of sound regulatory policy, I think it is the responsibility of the CFTC to put out a full rule proposal, as the SEC did, and to allow market participants and other financial regulators to comment on it. If the CFTC does not do so, but simply proclaims its rules full-blown, then – if the past is a guide – the proclaimed rule will not function as expected; it will go to the brink of effectiveness or beyond and then be postponed, and numerous no-action letters will have to be issued to deal with unanticipated problems. At some point, it should become clear that regulation by consultation works better than regulation by surprise.