The CFTC issued a request for public comment on a staff advisory regarding the applicability of “transaction-level” requirements for swaps to the activity of CFTC-registered, non-U.S. swap dealers entering into swaps with non-U.S. persons where the swaps may be agented by individuals located in the United States (“Covered Transactions,”). This request for comment should be read in connection with the first CFTC no-action letter of the new year in which the CFTC states that it will generally not take any action against non-U.S. swap dealers entering into Covered Transaction without complying with the CFTC’s “Transaction-Level” requirements.
In the request for comment, the CFTC stated that it is seeking comment on all aspects of staff advisory 13-69 (Nov. 14, 2013) (providing that transaction-level requirements generally apply to Covered Transactions). The request for comment also asks whether the requirements for non-U.S. swap dealers should differ based on the nature of the swap dealer (i.e., whether it is a so-called “guaranteed affiliate” or “affiliate conduit”). In view of the complex legal and policy issues involved. Comments must be received within 60 days after publication of the notice in the Federal Register.
CFTC Commissioner O’Malia issued a statement of dissent regarding the request for comment stating that “this is simply a strategic move by the Commission to try to duck blame for consistently circumventing the fundamental tenets of the [Administrative Procedure Act] and failing to adhere faithfully to the express congressional directive to limit the extraterritorial application of the Dodd-Frank Act to foreign transactions that ‘have a direct and significant connection with activities in, or effect on, commerce of the United States.'” He further asked market participants to comment on additional points related to the CFTC’s cross-border policy.
While the issuance of this “request for comment” is a positive development, the fact that CFTC Chairman Gensler found it necessary, as he departs, to issue it, and that the CFTC staff also approved a nine-month extension of a no-action relief that grants a “waiver” from enforcement of a staff advisory extending Commission “guidance” that may not be legally enforceable, demonstrates how far the Commission has strayed from due administrative process.
The CFTC’s administrative process has been deeply flawed, and, in some ways, it is hard even to describe the legal profile of the issue that is the subject of the request for comment. To recap: First, the CFTC published “interpretative guidance” that is purportedly not a “rule,” but is intended as an interpretation of how the CFTC views Dodd-Frank’s application to cross-border activities. Then, because the guidance was cursory and unclear as to the treatment of Covered Transactions (a single footnote related to the topic), the CFTC staff issued an “advisory” (13-69) which seemingly purports to be an interpretation of the CFTC guidance, but which may simply be a staff assertion of CFTC jurisdiction. Now the CFTC has issued a request for comment seeking views on whether the CFTC should adopt the advisory of its own staff.
Dissenting Commissioner O’Malia asserts that the CFTC’s “guidance” on the application of its rules to cross-border transactions was adopted in violation of the Administrative Procedure Act. To the extent that there was an argument made by the CFTC that it was necessary for the CFTC to adopt guidance because rule-making would have taken too long, the current request for comment, and the related no-action letter postponing the effectiveness of certain of the rules for (at least) another 8 1/2 months, undermine that argument. If the CFTC had undertaken an APA-compliant rulemaking process for cross-border issues, it would be much further along in making workable rules than it is now. One positive aspect of this advisory, is that it should allow the incoming CFTC leadership time to reconsider the Commission’s regulatory process and to put it on the right track both in terms of formal process and in terms of coordination with other regulators both in and outside of the United States.
Market participants should respond to the questions raised, but also should take Commissioner O’Malia’s advice and use the request as an opportunity to comment broadly on the CFTC’s approach to cross-border regulation. Firms that are seeking a framework for a broad response may want to take a look at the SEC’s request for comment on cross-border regulation, which asks a broad set of (generally thoughtful) questions.
