Monthly Archives: December 2018

CFTC Commissioner Quintenz Supports Revised Cross-Border Swaps Framework

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CFTC Commissioner Brian Quintenz expressed support for an approach toward substituted compliance determinations that distinguishes between the rules designed to address systemic risk reforms and those designed to address market activities. The approach is consistent with an alternative cross-border swaps framework espoused by CFTC Chair J. Christopher Giancarlo in a recent white paper.

In remarks at FIA Asia 2018, Mr. Quintenz disagreed with recent criticism of the white paper by CFTC Commissioner Rostin Behnam. Mr. Behnam argued that Mr. Giancarlo should have expressed his views through formal, statutory procedures, as opposed to a white paper. Mr. Quintenz stated that the majority of CFTC Commissioners will “find a consensus on restructuring the agency’s cross-border approach in the coming months.”

Among other things, Mr. Quintenz supports:

  • an approach toward substituted compliance determinations that distinguishes between the rules designed to address systemic risk reforms and those designed to address market activities;
  • expanding the use of exemptive authority for non-U.S. central counterparties (“CCPs”) that do not pose risks to the U.S. financial system, while CCPs posing a risk to the U.S. financial system should continue to be registered with the CFTC;
  • the proposition that swaps trading venues subject to comparable regulation abroad should be exempt from swap execution facility (“SEF”) registration with the CFTC;
  • the proposition that U.S. persons should be permitted to access non-U.S. platforms in non-comparable jurisdictions without SEF registration “subject to materiality threshold”; and
  • Mr. Giancarlo’s approach to which transactions count for purposes of the swap dealer thresholds, noting in particular that “foreign consolidated subsidiaries” need only count their dealing activity with U.S. and U.S.-guaranteed persons (rather than all transactions).

Mr. Quintenz also considered “arranged, negotiated and executed” (“ANE”) transactions. Mr. Quintenz said that it is a “credible proposition” that involvement of U.S. personnel in a trade should implicate some U.S.-based regulations. He urged the CFTC to consider whether its supervisory interest in a trade outweighs that of a non-U.S. regulator who has oversight of the counterparties. Mr. Quintenz advocated an ANE standard that focuses on client-facing sales and trading activity, rather than “incidental activity by U.S. personnel.” He also said that any ANE standard must provide market participants with clarity with respect to which regulations will apply to swap transactions from the outset.

Lofchie Comment: While it would be a wonderful thing if the SEC and the CFTC could reach full agreement on a (sensible) cross-border regulatory approach, there are a few issues on which such agreement is particularly important to decreasing regulatory complexity: the definition of U.S. (non-U.S.) person; the situations in which the involvement of a U.S. agent in ANE for a foreign dealer results in the imposition of U.S. legal requirements; and just what U.S. legal requirements are imposed as a result of the U.S. agent’s involvement.

CFTC Chair Opines on Benchmark Reform

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CFTC Chair J. Christopher Giancarlo recommended (i) reducing the number of obstacles to swaps clearing and (ii) transitioning away from LIBOR to alternative risk-free rates.

In remarks before the 2018 Financial Stability Conference in Washington, Mr. Giancarlo discussed two aspects of the CFTC approach to G-20 reforms: swap trading and clearing. He highlighted the CFTC’s recent proposal to amend its swap trading rules, saying that the changes would have the rules “encompass a wider scope of trading activity while enabling greater transactional flexibility.” In addition, Mr. Giancarlo discussed efforts to remove impediments to clearing. He cited the findings of a recent study sponsored by the Financial Stability Board on incentives to clearing (noting the CFTC co-chaired the study), and indicated that the CFTC will continue working with banking regulators to “educate them about the regulatory framework in place for cleared derivatives.” In particular, Mr. Giancarlo noted U.S. legal impediments preventing the use of client clearing margin.

As to benchmark reform, Mr. Giancarlo stressed the complexity of the process and warned that it “cannot be done through heavy-handed regulatory rulemaking.” He highlighted the work of the Alternate Reference Rates Committee (“ARRC”) and the importance of the public-private partnership driving that process. Regarding next steps, Mr. Giancarlo noted the actions taken by the ARRC, ISDA and others, and also urged market participants to consider the use of SOFR-linked derivatives, given both the impact of LIBOR going away and the potential benefits of what Mr. Giancarlo referred to as the “quite successful” clearing of SOFR swaps on LCH and CME.