Whether regulators decide to substitute another jurisdiction’s swap rules for their own may mean the difference between swap users having to comply with one rule set or two for transactions booked in foreign jurisdictions. The first of such rulings is slated to arrive September 1.
That deadline for the European Securities and Market Authority (ESMA) to advise the European Commission (EC) on whether US and Japanese swap rules are sufficiently similar to be substituted for European Market Infrastructure Regulation (EMIR) rules will be the first of its kind. ESMA must make similar determinations for the rules of eight other jurisdictions, including Canada, Australia and Hong Kong, by October 1.
In fact, all regulators will ultimately have to make such determinations, but Europe and the US are the jurisdictions between which there are the most cross border swaps. When regulators find jurisdictions to be sufficiently “equivalent”—EMIR’s term for allowing substitution—then swap users can apply the foreign jurisdiction’s rules to the transaction instead of their own, and so avoid the additional expense of abiding by both rule sets.
The Commodity Futures Trading Commission (CFTC) potentially complicated matters further in mid-July. It ruled that while substituting one set of rules for another was permissible, assuming each set has similar regulatory objectives, it could still follow its originally proposed approach and determine rule sets’ comparability requirement by requirement.
The CFTC divides rule sets into 15 comparable categories. Although US swap rules stemming from Dodd-Frank have similar objectives to EMIR rules, the requirements in areas such as clearing and reporting differ somewhat. Market participants are concerned the regulator could determine most requirements are broadly comparable, but US rules must be followed for one or more requirements. Such a scenario would result in a hodgepodge of requirements swap users would have to track to be in compliance.
The Association for Financial Markets in Europe (AFME) noted in its comment letter that “to the extent that the Commission intends substituted compliance only to be granted in the case where it finds rule-by-rule analogs in the relevant non-US jurisdiction, rather than where there are common regulatory objectives, its approach will be more likely to create a regime of conflicting, confusing and unnecessarily complex regulations that will add cost and complexity for customers.”
The CFTC has also postponed its deadline to determine which rule sets are “substitutable” through a no-action letter in July, and that deadline is now set for December 21. Those determinations will arrive in the shape of a formal order by the commission to the CFTC staff outlining how to proceed. CFTC spokesman said it remains unclear when such an order would be issued or what it might look like.
Ryan McKee, a director at Chatham Financial, noted the difficulty swap users would face if the CFTC makes those determinations just before the deadline, given they may suddenly have to comply with all or parts of multiple rule sets.
“It’s very important the CFTC does not do what it has done with past rules and wait until the very last minute before certain relief expires to make those determinations,” Ms. McKee said.