Chairman Gary Gensler released a paper, previously published in a French financial journal in April, that focuses on cross-border regulation of the swaps market. According to his paper, as the financial system failed in 2008, the swaps market, which was basically not regulated in the United States, Europe, Canada or Asia, failed to meet their objectives, causing a great financial crisis.
Chairman Gensler’s paper is divided into the following areas of focus:
- New International Consensus to Reform the Swaps Market
- Transparency – Lowering Cost and Increasing Liquidity, Efficiency, and Competition
- Clearing – Lowering Risk and Democratizing the Market
- Swap Dealer Oversight – Promoting Market Integrity and Lowering Risk
- International Coordination on Swaps Market Reform
Lofchie Comment: If Chairman Gensler was trying to persuade the Europeans, who have been very blunt in their criticism of the CFTC’s go-it-alone regulation, that the CFTC has done everything possible to work with them, he failed. Their response has been negative; see, e.g., European Commissioner’s ”Invitation” to CFTC Chairman to Extend the CFTC Exemptive Order on Cross-Border Swaps Regulation.
If Chairman Gensler was trying to persuade an American political audience of the CFTC’s efforts at cross-border cooperation, he seems not to have succeeded. Yesterday, the House of Representatives by a very substantial majority adopted a bill that would require the CFTC to provide a fuller explanation of its cross-border policies and to cooperate more closely with both the SEC and European regulators. Even assuming that the relevant bill (the Swap Jurisdiction Certainty Act) has no chance of being adopted into law by the Senate, the fact that it was adopted by a vote of 301-124 shows that a large majority of the House is actively opposed to the Chairman.
Whatever the merits of the CFTC’s rulemaking may be, those who are subject to its rules are going to be skeptical of a paper that describes them as “common-sense rules of the road.” A set of rules that requires a 200-page discussion of just the defined term “swap,” followed by numerous no-action letters on the same topic, may someday be regarded as brilliant, but they are not going to be thought of as “common-sense” rules.
Soon, Chairman Gensler will face a crucial decision as to whether to extend the CFTC’s existing cross-border relief or let it lapse without any rule to take its place. See, e.g., Commissioner O’Malia Speaks on Cross-Border, ”Made Available to Trade” and Data Management. Most believe it would be the right and prudent course to extend the relief. That said, I think that most non-U.S. regulators and firms might prefer the chaos which might come without a rule over the hasty adoption of a bad cross-border rule.