Streetwise Professor Craig Pirrong on Cross-Border Issues at the CFTC

University of Houston finance professor Craig Pirrong discussed the ongoing tension between the CFTC and its European counterparts with respect to cross-border issues in his blog post titled “Damage Control at the CFTC.”

According to Professor Pirrong, the failure on both sides to recognize cross-jurisdictional central counterparty clearinghouses (“CCPs”) could make clearing swaps “prohibitively expensive” and increase the “already worrisome fragmentation of swaps markets.” Professor Pirrong asserted that European regulators are “dismayed” at U.S. Regulators’ “rather imperialistic attitude” on derivatives regulation, especially under the leadership of Chair Gensler. He referenced CFTC Commissioner Christopher Giancarlo’s scathing speech,” in which Commissioner Giancarlo pointed out a number of CFTC rules that fail to serve their intended purpose of reducing risk, including:

  • trading only on order books and request-for-quote systems to two, then three, counterparties;
  • exchange-certified “made available to trade” determinations;
  • swap execution facility position-limit maintenance and enforcement;
  • limitations on counterparty transparency; and
  • CFTC Staff Advisory No. 13-69 (November 14, 2013).

Additionally, Professor Pirrong and Commissioner Giancarlo criticized the recent ruling by the D.C. District Court on the CFTC’s issuance of its “Interpretive Guidance” and a “Staff Advisory,” rather than a formal rule regarding cross-border issues. According to Professor Pirrong, the CFTC is attempting through its recent guidance to “impose its dictates through such procedural legerdemain.” In his speech, Commissioner Giancarlo stated that he intends to do everything he can to encourage the CFTC to replace its cross-border guidance with a final rule. Commissioner Giancarlo also would like to see the CFTC withdraw the November 13 Advisory, which he believes “fails not only the letter and spirit of the ‘Path Forward,’ but also contradicts the conceptual underpinnings of the CFTC’s Interpretive Guidance.”

Professor Pirrong expressed the view that under the new CFTC Commissioner, Timothy Massad, the CFTC could implement a new “more reasonable” approach to derivatives regulation than under his predecessor.

Lofchie Comment: Professor Pirrong’s comments and, more importantly, CFTC Commissioner Giancarlo’s speech, raise two important procedural policy questions for the CFTC. First, is it good public policy for the CFTC to regulate cross-border transactions through the issuance of what it calls “guidance” rather than a formal rulemaking process? While a court affirmed the CFTC’s authority to rely on guidance, the fact that the CFTC has the “authority” to act without going through a rulemaking process does not mean that acting in this manner is good policy. The SEC’s rulemaking on cross-border issues is a better piece of work than the CFTC’s guidance, and that the difference is likely reflected in part by the additional time that the SEC gave to considering difficult issues and the discipline of going through a formal rulemaking process, including responding to public comments and conducting a cost-benefit analysis.

Second, the CFTC must decide this: what are the fundamental policies behind Dodd-Frank? There is no reason to believe that Dodd-Frank was primarily intended to address swap-trading procedures. Thus, there is no reason for the CFTC to seek to impose United States trading rules on European swaps markets (after all, we do not impose our trading rules on European securities markets or futures markets). Accordingly, it follows that the CFTC should scale back its attempts to impose trading procedures on the markets generally, perhaps leaving some room for knowledgeable market participants to decide how they wish to trade.

See: Streetwise Professor Craig Pirrong’s blog post, “Damage Control at the CFTC“.