CFTC Chair Touts Cross-Border Regulatory Deference as Best Alternative

CFTC Chair J. Christopher Giancarlo called on European Union (“EU”) regulators to “commit to an equivalence determination process that focuses on achieving comparable regulatory outcomes and not rule-by-rule exactitude.” In a speech at the Eurofi Financial Forum, Mr. Giancarlo highlighted the importance of U.S. deference toward non-U.S. regulators as to their control over markets and market participants within their jurisdiction; he called on EU policymakers and regulators to adopt a similarly deferential approach to the cross-border application of European swaps regulation to U.S. markets and market participants.

Mr. Giancarlo previewed a forthcoming white paper that will offer recommendations on the application of the agency’s swap rules to cross-border activities. He criticized current EU legislative proposals that raise doubts with respect to the continuance of the policy of cross-border deference and cautioned that failing to adopt an approach of cross-border deference would “turn [global regulation] down that very different path of overlapping and confounding cross-border regulation with its high regulatory cost and constraints on economic growth.”

Lofchie Comment: When he was the CFTC’s Chair, Mr. Gensler asserted that the United States would adopt rules governing the global derivatives markets and market participants, and that Europe would just have to accept that reality. Europe didn’t. Asia didn’t. Joint Cautionary Letter from the EU, France, Japan and the UK to the CFTC on U.S. Cross-Border Swaps Regulation (with Lofchie Comment). Mr. Gensler was being very aggressive. The hand he played was not helped by the fact that the CFTC’s regulations were not so great. The rest of the world responded with a collective no thanks.

Current CFTC Chair Giancarlo is reversing course. It does not make sense for the CFTC to attempt to regulate European and Asian markets. But how will Europe react? Chair Giancarlo suggests that, however Europe acts, the United States will respond in kind.

International Regulators Launch “Global Financial Innovation Network”

Several international regulatory agencies collaborated in the creation of the “Global Financial Innovation Network” (“GFIN”). The new network will focus on regulatory issues related to emerging technologies. There are 11 regulatory agencies in the new network including the Consumer Financial Protection Bureau and the UK’s Financial Conduct Authority.

In a draft consultation document, the agencies explained three major functions of the initiative: (i) information- and knowledge-sharing among regulators, (ii) collaboration in exploring major policy questions and (iii) “cross-border trials” instituted to aid companies as they deal with multi-jurisdictional regulatory challenges. The network is intended to serve as a resource for FinTech companies navigating the complicated web of international regulation. The regulators anticipate that GFIN will increase the speed at which innovative products are able to reach international markets. They also argue that the GFIN will promote transparency and investor protection.

The GFIN proposed the following as its organizational mission statement:

“The GFIN is a collaborative policy and knowledge-sharing initiative aimed at advancing areas including financial integrity, consumer wellbeing and protection, financial inclusion, competition and financial stability through innovation in financial services, by sharing experiences, working jointly on emerging policy issues and facilitating responsible cross-border experimentation of new ideas.”

The GFIN is requesting feedback on its proposed objectives, functions and structure. Comments must be submitted by October 14, 2018.

President Trump Imposes Sanctions against Iran

The Trump administration issued a new Executive Order (the “New Iran E.O.”) imposing certain U.S. sanctions against Iran, effective August 7, 2018.

Consistent with President Trump’s May 8 announcement ending U.S. participation in the Joint Comprehensive Plan of Action (Iran nuclear deal), the New Iran E.O. restores sanctions related to, among other things: (i) the Iranian government’s purchase or acquisition of U.S. dollars; (ii) Iran’s trade in gold and precious metals; (iii) the sale, supply or transfer to or from Iran of graphite, raw or semi-finished metals, and software for integrating industrial processes; (iv) significant transactions related to Iran’s national currency, the rial, and the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial; (v) the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and (vi) Iran’s automotive sector.

In addition, certain wind-down authorizations expired at 11:59 p.m., EDT, on August 6, 2018, namely, those related to (i) the importation into the United States of Iranian-origin carpets and foodstuffs; (ii) activities related to the export or reexport to Iran of commercial passenger aircraft and related parts and services; and (iii) activities undertaken pursuant to General License I that relating to contingent contracts for activities related to passenger aircraft-related licensing.

In connection with the above, the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”) issued FAQs regarding the New Iran E.O., and updated certain existing Iran sanctions-related FAQs.

 

CFTC Chair Evaluates Challenges Facing Derivatives Market

CFTC Chair J. Christopher Giancarlo assessed the challenges facing the CFTC and the United States in the global competition as a center for the derivatives markets. In an address at the West Texas Legislative Summit, Mr. Giancarlo warned that the CFTC must be proactive if the United States is to retain its preeminent position in the global financial markets.

Mr. Giancarlo described the significance of the commodity derivatives market and its impact on pricing. He pointed out that even those who do not participate in such markets are still affected and that 90 percent of companies in the Fortune 500 use derivatives to hedge. He highlighted the challenge of global competition, particularly China’s domestic futures market, specifically alluding to the country’s recent opening to international participation, which has “competitive implications” for the United States. To maintain “world leadership,” he said, it is urgent that derivatives markets in the United States maintain “openness, orderliness, and liquidity” to sustain global economic leadership.

Mr. Giancarlo emphasized the importance of establishing a regulatory framework that is “ahead of the curve,” and advocated for the “SMART-REG” approach he first outlined in 2014. This approach, he said, is intended to “solve problems – real problems, not invented ones.”

Mr. Giancarlo asserted that under his leadership, the CFTC has “emphasized greater care and precision in rule drafting, more thorough econometric analysis, and a reduced docket of new rules and regulations to be absorbed by market participants.”

Lofchie Comment: Chairman Giancarlo went beyond a discussion of the derivatives markets to discuss the underlying commodities markets. In explaining the success of the shale revolution in the United States, he described a “combination of American technological innovation, North American geology, U.S. property law, the skilled and entrepreneurial American workforce and our dynamic capitalist economy.” Chairman Giancarlo continues to be a voice of clarity and an educator in an often confused debate about the value of markets and the limits of governments as providers of services and products.

It is not so long ago that the Union of Soviet Socialist Republics collapsed in economic failure. That collapse seemed as if it would put an end to any debate as to the benefits of government ownership of the means of production. But today that debate is revived, or at least there are new advocates for it. To the extent that these advocates are taken seriously, it is important that advocates for private enterprise and for market competition not be shy to point out successes, face criticisms and to make comparisons as to the successes of different systems.

UK-US Financial Regulation: The Benefits of Greater Coherence

“UK-US Financial Regulation: The Benefits of Greater Coherence” illustrates the importance of “regulatory coherence” across borders.

Authors Ike Brannon, Bob Jennings, and Julie Chon delve into the longstanding and seminal UK and US relationship from a financial regulatory perspective.  They examine pathways to deepen and formalize cooperation with the aim to strengthen the international financial system.

As always, comments, critique, complement, or alternative thoughts are eagerly sought.

View the paper.
http://www.centerforfinancialstability.org/research/US_UK_Regulatory_Coherence.pdf

FinCEN Calls Attention to Transactional Red Flags Associated with International Corruption

The U.S. Treasury Department Financial Crimes Enforcement Network (“FinCEN”) issued an advisory describing how corrupt foreign “politically exposed persons” (“PEPs”) access the U.S. financial system. The advisory provides guidance on the (i) risks that U.S. financial institutions face when providing banking services to PEPs and their financial facilitators and (ii) types of suspicious transactions that may trigger reporting obligations under the Bank Secrecy Act.

The advisory includes the following non-exclusive list of red flags that may help identify methods used to hide the proceeds of human rights abuses and other illicit international activities:

  • using third parties when it is not normal business practice;
  • using third parties to shield the identity of a PEP;
  • using family members or close associates as legal owners;
  • using corporate vehicles such as limited liability companies (LLCs) to hide ownership, involved industries or countries;
  • receiving information from PEPs that is inconsistent with publicly available information;
  • transactions involving government contracts that (i) are awarded to companies in a seemingly unrelated line of business, or (ii) originate from or are going to shell companies that appear to lack a general business purpose;
  • documents supporting transactions regarding government contracts that include (i) charges that are higher than market rates, (ii) overly simplistic information or (iii) insufficient detail;
  • payments connected to government contracts that come from third parties that are not official government entities; and
  • transactions involving property or assets expropriated or otherwise taken over by corrupt regimes, including senior foreign officials or their cronies.

The advisory also provides examples of suspicious activities by PEPs and their financial facilitators, such as:

  • moving funds repeatedly to and from countries with which the PEP does not have ties;
  • requesting to use services of a financial institution or a designated non-financial business or profession (“DNFBP”) not normally associated with foreign or high-value clients;
  • holding substantial authority over or access to state assets and funds, policies and operations; and
  • controlling the financial institution or DNFBP that is a counterparty or correspondent in a transaction.

The advisory indicated that FinCEN would update these red flags and typologies in the future, and reminded financial institutions of their obligation to identify suspicious transactions and file suspicious activity reports (SARs) under the Bank Secrecy Act.

NY Fed President Calls for “Aggressive Action” for LIBOR Transition

Federal Reserve Bank of New York President William C. Dudley argued that “aggressive action” is needed across the financial industry to address market-wide issues concerning the global market transition away from LIBOR.

In his remarks at Bank of England’s Markets Forum, Mr. Dudley expressed concern over “the great uncertainty over LIBOR’s future and the risks to financial stability that would likely accompany a disorderly transition to alternative reference rates.” He stated, “we need aggressive action to move to a more durable and resilient benchmark regime.”

Mr. Dudley recounted the history and other factors that led to the need for the global markets to transition away from LIBOR. He emphasized that this transition represents a significant risk for firms “of all sizes,” which should actively manage the risks in a way that is commensurate with their exposures.

Mr. Dudley emphasized the important role of the official sector, including the Federal Reserve and the Financial Stability Board, in the development of reference rate principles, convening private sector participation and supplying robust alternative reference rates. He recognized the progress made by market participants acting through the Alternative Reference Rates Committee to identify a more robust U.S. dollar reference rate and to develop a plan for an orderly transition, including best practices in contract design. Mr. Dudley opined that “LIBOR is likely to go away – and it should,” but noted that there are those with a direct interest in LIBOR, “such as its administrator,” who support the “status quo.”

President Trump Imposes Additional Sanctions on Venezuela

President Donald J. Trump issued an Executive Order (“E.O”) prohibiting certain financial transactions with the government of Venezuela. President Trump cited the Maduro regime’s recent activities, which include “attempts to undermine democratic order by holding snap elections that are neither free nor fair” – a reference to the presidential elections held on May 20.

The transactions prohibited by the E.O. include, among others, any dealings in the United States or by U.S. persons related to:

  • the purchase of debt owed to the Government of Venezuela, including accounts receivable;
  • debt owed to the Government of Venezuela that, after the effective date of the E.O., is pledged as collateral, including accounts receivable; and
  • the sale, transfer, assignment or pledging as collateral by the Government of Venezuela of any equity interest in which the Government of Venezuela has 50 percent or greater ownership interest.

As with previous Venezuela-related Orders, including E.O. 13692, E.O. 13808 and E.O. 13827, the “Government of Venezuela” is defined broadly to cover not only political subdivisions and agencies, but also companies and other entities – including the state-owned oil company Petroleos de Venezuela S.A. (“PdVSA”) – that are owned or controlled by, or acting for or on behalf of, the Government of Venezuela.

CFTC and UK Financial Conduct Authority Sign FinTech Collaboration Arrangement

The CFTC and the UK Financial Conduct Authority (“FCA”) signed an agreement to facilitate collaboration, share information and support each other’s FinTech initiatives. This is the first FinTech arrangement for the CFTC with a non-U.S. counterpart.

The “Cooperation Arrangement” is primarily focused on the agencies’ respective FinTech initiatives, specifically the CFTC’s “LabCFTC” and the FCA’s “Innovate” programs. The regulators agreed to a framework for the exchange of information on businesses who participate in the programs, trends and developments in FinTech, regulatory issues surrounding FinTech development, best practices for engaging with innovators, and the activities of organizations that promote innovation. The regulators further committed to referring FinTech businesses to each other when such businesses are interested in operating in the other regulator’s jurisdiction. They also agreed to a variety of other measures intended to foster their mutual understanding of technology. The FCA and CFTC will host a joint event in London to facilitate FinTech firms’ engagement with both regulators.

CFTC Chair J. Christopher Giancarlo spoke of the groundbreaking nature of the arrangement: “This is the first FinTech innovation arrangement for the CFTC with a non-U.S. counterpart. We believe that by collaborating with the best-in-class FCA FinTech team, the CFTC can contribute to the growing awareness of the critical role of regulators in 21st century digital markets.” FCA Chief Executive Andrew Bailey agreed, saying, “As our first agreement of this kind with a U.S. regulator, we look forward to working with LabCFTC in assisting firms, both here in the UK and in the U.S., who want to scale and expand internationally in our respective markets.”

Lofchie Comment: Regulators cooperating with each other to better understand markets and products and to prepare for change is a far better approach than fighting over jurisdiction or shutting down change.

U.S. Banking Agencies Support Finalization of International Capital Standards Reforms

The Basel Committee’s oversight body, the Group of Central Bank Governors and Heads of Supervision, finalized reforms to the Basel III international capital standards. The reforms’ key elements include revisions to (i) the standardized approach for credit risk, (ii) the standardized approach for operational risk, (iii) the internal ratings-based approach for credit risk, (iv) the credit valuation system framework, and (v) the measurement of the leverage ratio and a leverage ratio buffer for global systemically important institutions. In addition, the reforms will modify the floor for calculating banks’ risk-weighted assets that are generated by their internal models. The final standards text detailing the reforms and a summary document containing short descriptions were made available by the Basel Committee.

In an interagency release, U.S. banking agencies (the Board of Governors of the Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency) expressed support for the final reforms. The agencies explained that the reforms “are intended to improve risk sensitivity, reduce regulatory capital variability, and level the playing field among internationally active banks.” The agencies will assess how to appropriately apply the reforms in the United States and propose any changes through the standard rulemaking process.