CFTC Commissioner Jill E. Sommers delivered a speech before the Cadwalader Energy Conference to discuss her perspective on the energy markets and the CFTC’s role in the oversight and regulation of swap markets. Commissioner Sommers criticized the CFTC for abandoning its principles-based regulatory approach in favor of a prescriptive one-size-fits-all regime, which has led to a morass of confusion and uncertainty as a result of attempting to regulate for potential loopholes. In an effort to close every conceivable loophole, rather than to regulate for the general markets, Sommers argues that the CFTC has finalized rules which are vague, inconsistent and subject to legal challenge. This (which Sommers describes as “death by a thousand cuts”) is costing market participants untold time and expense.
Commissioner Sommers stated that she believes a principles-based regulatory umbrella would address systemic risk and allow markets to continue to serve their intended purposes. In addition to the need to improve its cost-benefit analysis, the Commission also faces several challenges with regard to the cross-border application of its swaps regulation. In her speech, Sommers outlined four fundamental concerns which she believes the Commission should address:
- Contrary to Chairman Gensler’s interpretation of Dodd-Frank Section 722 that cross-border regulation is merely appropriate whenever “financial institutions operating outside the United States transmit risk directly into the United States through swap transactions with U.S. Persons,” Sommers argued that the jurisdiction as written should be followed. The jurisdiction explicitly states that a swap transaction must have a direct and significant connection to the U.S.
- The Commission should revisit the definition of a “U.S. person” as soon as possible to allow entities to adjust their business models and behaviors.
- The Commission should avoid rule-by-rule comparisons for the purpose of comparability determinations because, according to Sommers, they’re too vague. The Commission should instead take into account the fact that many non-U.S. SDs and MSPs will be subject to home country regulation which seeks to achieve the same goals as Dodd-Frank. Thus, overlapping regulations create compliance costs without counterbalancing benefits.
- The Commission should not make the cross-border guidance more confusing than necessary.
Finally, Commissioner Sommers concluded by affirming that it is the responsibility of all five Commissioners to ensure that the rules can stand the test of time and be implemented in a reasonable fashion.
View speech here (links externally to CFTC website).