Republican Senators ask regulators to reconsider any proposals that reach across borders to control swaps.
One small piece of the Dodd-Frank Act has the swap industry a little worried lately. It’s a section of the law that raises the question of whether US regulators have jurisdiction over transactions done outside the US. Several US senators want know if this will be the case and make sure that this proposal is considered carefully.
In a letter to the Fed’s Ben Bernanke, the CFTC’s Gary Gensler, the SEC’s Mary Schapiro and two other regulators, Senators Mike Crapo (R-ID), Mike Johanns (R-NE), David Vitter (R-LA) and Pat Toomey (R-PA) expressed concern that Dodd-Frank “may directly conflict with requirements in other countries.” Further, they wrote, the proposals “on their face would regulate swaps between global affiliates and cross-border guarantees, which are key means of reducing risk and raise few regulatory issues.”
The proposal they may be referring to could be Section 929P(b) of Dodd-Frank, the language of which, according to Congressman Paul Kanjorski, “is to make clear that in actions and proceedings brought by the SEC or the Justice Department, … provisions of the Securities Act, the Exchange Act, and the Investment Advisers Act may have extraterritorial application.” But the wording does not say that exactly. One attorney, George T. Conway III, of Wachtell, Lipton, Rosen & Katz, wrote in 2010 that the proposal “does no such thing.” The provision, he wrote on a Harvard Law School blog, “unambiguously addresses only the ‘jurisdiction’ of the ‘district courts of the United States’ to hear cases involving extraterritorial elements.”
Still, one line in DFA that might be a sticking point refers to “conduct occurring outside the United States that has a foreseeable substantial effect within the United States.” How the SEC or the DOJ would describe “substantial effect” might be different than how industry might describe it. In that regard, it is not that clear.
And in their letter, the Senators seek that clarity. Given that derivative rules should take into account how other countries are dealing with them, and should avoid the risk of regulatory arbitrage, the Senators wrote that they want regulators to “clearly address cross-border issues in their rules and to avoid unnecessarily impeding the global swaps operations by harmonizing the substance and timing of your proposals with your international counterparts.” That harmonizing is far from certain, despite everyone’s hopes that it will be done (see related story here).