The CFTC and the European Commission on Common “Path Forward” for Regulating Derivatives

The CFTC has issued a press release stating that CFTC Chairman Gensler and EC Commissioner Barnier have reached agreement on a ”Path Forward” as to how to regulate cross-border derivatives.

The Path Forward is intended to cover matters such as the regulation of clearing corporations, swap execution facilities, trade reporting, trade execution requirements and the definition of ”US person.” In this regard, the Path Forward indicates that (i) offshore guaranteed affiliates of U.S. persons could be regarded as U.S. persons, but trades with them would be subject only to substituted compliance, (ii) that foreign branches of U.S. banks could satisfy U.S. requirements by means of substituted compliance and (iii) offshore funds that are majority-owned by U.S. persons or that have their principal place of business in the United States would be treated as U.S. person (and presumably substituted compliance would not be available).

While the Path Forward provides some milestone dates, they are not phrased as ”deadlines.”

Lofchie Comment:  The Path Forward appears to reflect recognition by the CFTC that EC regulated swap dealers are subject to comparable regulation, and thus that the CFTC will generally defer to EC regulators. Accordingly, the agreement by the CFTC with EC seems, at least as a general matter, to be a concession by the CFTC that it can not go its own way in international financial regulation; further, the CFTC’s agreement seems to bring the CFTC back into line with the SEC in terms of working out an approach for cross-border co-operation.

It is a tremendous positive that the CFTC has moved off its go-it-alone approach to work with European regulators, and hopefully with the SEC and with other non-U.S. regulators.  That said, the “Path Forward” is a brief statement, not a detailed rulemaking.  All of the details are left open.  It seems now appropriate for the CFTC to follow the lead of the SEC and to publish a proposed rule that would be subject to comment by market participants in the United States.  The implications of the proposal for cross-border competition are quite significant.  A rule that is not well considered could further disadvantage U.S-based institutions or could motivate U.S. clients to move their business away from the United States.  Please note that the Path Forward only deals with Europe; it does not make mention of Canada or various Asian jurisdictions. 

See:  CFTC Press Release.