MFA Submits Comments to IOSCO and FSB on Assessment Methodologies for Nonbank Non-Insurer SIFIs

The Managed Funds Association (“MFA”) submitted a comment letter to the Financial Stability Board (“FSB”) and IOSCO in response to the FSB-IOSCO consultation paper on assessment methodologies for nonbank and non-insurer globally and systemically important financial institutions (“SIFIs”).  

In the letter, MFA encouraged the FSB and national systemic risk regulators to analyze hedge fund information using a quantitative-based metric, which MFA believes will demonstrate that hedge funds do not pose systemic risk.  Additionally, MFA responded to specific proposals in the consultation paper, encouraging the FSB to adopt final recommendations consistent with the following key points: 

  • systemic risk regulators should conduct analysis at the individual fund level and not at the level of the family of funds, the asset manager, or the asset manager and its funds collectively;
  • the FSB and IOSCO should use a metric other than gross notional exposure (“GNE”) to measure an investment fund’s gross assets under management, since GNE does not a reflect a fund’s actual market risk or counterparty exposure and ignores material variations among positions by (i) asset class, (ii) tenor, (iii) netting terms, (iv) margining and collateral arrangements and (v) clearing status;
  • the FSB and IOSCO should only recommend indicators that are consistent with the statement in the consultation paper that investment funds may cause systemic risk via the counterparty channel and the market channel; and
  • the FSB and IOSCO should only recommend indicators that are well designed to measure systemic risk and not recommend indicators that are likely to measure other types of non-systemic risk.

See: MFA Comment Letter.
Related news: SIFMA AMG Submits Comments to the FSB and SEC in Response to OFR Study and with Regard to Separate Accounts (April 8, 2014); SIFMA AMG Submits Comments to the FSB on Assessment Methodologies for Identifying Non-Bank Non-Insurer G-SIFIs (April 7, 2014); IOSCO and FSB Publish Proposed Assessment Methodologies for Identifying Non-Bank Non-Insurer Global SIFIs (January 9, 2014).


Market Participants Support Challenge to CFTC Cross-Border Guidance

ISDA, SIFMA and the Institute of International Bankers (“IIB”) (together, the “Associations”) submitted a consolidated reply in support of their motion for summary judgment and in response to the CFTC’s Cross-Motion for Summary Judgment and to Dismiss in Part, in the Associations’ challenge to the CFTC’s Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations (the “Cross-Border Rule”). The consolidated reply asks the Court to grant the Associations’ motion for summary judgment and to deny the CFTC’s cross-motion, arguing that:

  • Though the CFTC defended the Cross-Border Rule as a policy statement, and contended that the Cross-Border Rule cannot possibly be a rule, as it contains disclaimers of any binding effect, the Cross-Border Rule nevertheless establishes who must register, which transactions must be cleared and other critical aspects of the CFTC’s regulatory regime; therefore, it is a substantive rule.
  • Because the CFTC did not properly address cross-border application in adopting the Title VII rules, those rules cannot apply overseas and are invalid to the extent to which they purport to do so.
  • In addition to the procedural issues with the Cross-Border Rule, the Associations outline additional significant errors by the CFTC in the course of fashioning the Rule’s specific provisions.
  • Notwithstanding the CFTC’s argument that the Associations’ claims are not ripe for decision because the Cross-Border Rule adopted a “case-by-case approach” and “does not purport to express a view on all scenarios,” the Cross-Border Rule is a substantive rule and therefore is reviewable.
  • Finally, the Associations contend that the Court can and should remedy the CFTC’s violation of basic rulemaking procedures. The Associations state that, contrary to the CFTC’s claim, granting the request relief would “promote the public interest,” foster uniform and transparent regulation, prevent lawless agency action and, ultimately, uphold the rule of law. The Associations quote N. Mariana Islands v. the United States, which found that “The public interest is served when administrative agencies comply with their obligations under the APA.”

Lofchie Comment:  The CFTC should lose this suit as a matter of law. In many ways, though, the CFTC would benefit from such a loss, which would allow it to walk away from a material part of the flawed rulemaking and restart with a better approach.  As things are progressing, the agency may have no choice.  The House of Representatives yesterday passed a bipartisan bill (supported by both the Republican and Democratic leaders of the House Agriculture Committee) that would effectively render the guidance moot (Section 359 of the bill, titled Cross-Border Regulation of Derivatives) and require the CFTC to adopt a formal rule governing cross-border jurisdiction within 180 days (not a long timeframe given the complexity of the issues).  The CFTC is now stuck with guidance that it has conceded is not enforceable as an administrative matter, that makes very little sense as a matter of public policy, that has been rejected by both Republicans and Democrats in the House, and that may be rejected in the Senate as well (assuming that the issue continues to be addressed in a bipartisan manner).

See: Plaintiffs’ Consolidated Reply in Support of Their Motion for Summary Judgment.
Related news: Better Markets Amicus Brief Supports CFTC’s Cross-Border Guidance (March 21, 2014);CFTC Legal Memorandum to Dismiss Challenge to Its Cross-Border Guidance (March 18, 2014); Chamber of Commerce Submits Amicus Brief Regarding Lawsuit against CFTC Cross-Border Rule (February 5, 2014); Market Participants File Statement to Explain Their Standing in Lawsuit Challenging CFTC Cross-Border Guidance(January 29, 2014); Market Participants File Opposition to CFTC’s Motion to Delay Judgment in Lawsuit Challenging CFTC Cross-Border Guidance (January 17, 2014); Market Participants File Amended Complaint Challenging CFTC Cross-Border Guidance (January 8, 2014); Market Participants File Lawsuit Challenging CFTC Cross-Border Guidance for Being a Rule Adopted in Violation of the APA (December 4, 2013); CFTC Commissioner O’Malia Dissents from CFTC Cross-Border Guidance Statement (July 19, 2013); CFTC Approves Cross-Border Guidance and Exemptive Order (July 15, 2013).


House Agriculture Committee Approves Bipartisan Legislation to Reauthorize CFTC

The House Agriculture Committee approved the Customer Protection and End User Relief Act (H.R. 4413) by voice vote. The Bill, which was introduced on April 7, 2014, would reauthorize and improve the operations of the CFTC and address concerns relating to market certainty and customer protection.

The bill was reported out of Committee on April 9, 2014.  Among the most significant aspects of the bill, are (i) the express imposition of cost-benefit requirements on the CFTC and (ii) the required changes that the bill would make in the administration of the CFTC.

The proposed cost-benefit provision would amend the existing one in Sec. 15(a) of the Commodity Exchange Act to make it more comprehensive and robust. In essence, the new language would make the cost-benefit consideration consistent with the cost-benefit analysis requirements of President Obama’s Executive Order 13563 for the entire executive branch to which the CFTC agreed some time ago when flaws in the way it went about cost-benefit analysis relating to Dodd-Frank rules were exposed by the agency’s Inspector General. This will codify such requirements in the statute.

Among the new items that the CFTC would be required to take into account and, presumably, to evaluate in its cost-benefit analyses would be:

  • considerations of the impact on market liquidity in the futures and swaps markets;
  • available alternatives to direct regulation;
  • the degree and nature of the risks posed by various activities within the scope of its jurisdiction;
  • the costs of complying with the proposed regulation or order by all regulated entities, including a methodology for quantifying the costs (recognizing that some costs are difficult to quantify);
  • whether a proposed regulation or order is inconsistent, incompatible or duplicative of other Federal regulations or orders; and
  • whether, in choosing among alternative regulatory approaches, the CFTC selects those which maximize net benefits (including potential economic and other benefits, distributive impacts and equity).

In addition, the legislation would make the Chief Economist and the Division Directors answerable to the Commission, not the Chairman alone as in current practice.

Lofchie Comment: While the proposed cost-benefit provisions of the bill are clearly a reaction to the conduct of former CFTC Chairman Gensler, the same would appear to be true of the statutory provision giving the Commission as a whole (and not merely the Chairman) authority with respect to Chief Economist and the Division Directors. Shared authority with respect to these important posts could go a long way toward reducing the future risk of fostering an imperial head of an agency who is able to exercise authority on a remarkably unchecked basis.

See: H.R. 4413; Summary of Legislation; House Agriculture Committee Press Release.
See also: FIA Statement on Bill.
Related news: House Agriculture Committee Introduces Legislation to Reauthorize CFTC (April 9, 2014).