Foreign swap dealers received another round of temporary relief from US regulators that will permit their personnel in the US to participate in arranging transactions without requiring the firm to comply with Dodd-Frank Act rules, and a longer-term solution may be in the works.
The issue came to a head last November when the Commodity Futures Trading Commission (CFTC) issued an advisory stating that certain requirements of Dodd-Frank should apply to foreign swap dealers.
“The issue is that the CFTC feels its regulations require a non-US Swap Dealer to comply with certain transaction level requirements for a trade between that non-US Swap Dealer and a non-US counterparty if the trade is executed, negotiated, etc., by an employee or agent located in the US and working for the non-US Swap Dealer,” said Patrick Trozzo, vice president at Reval.
Mr. Trozzo said the transaction-level requirements include mandatory clearing, trade documentation to support the end-user exemption for clearing a trade, portfolio reconciliation, other trade documentation requirements, real-time trade reporting, and time requirements for trade confirmation. He added that the requirements would impact those swap dealers’ non-US corporate counterparties and potentially also affiliates of US multinationals outside the country that aren’t guaranteed by the parent company.
Major swap dealers tend to have global operations and often locate personnel with the relevant expertise in major financial centers such as New York. The CFTC advised market participants that it believed such trades should be subject to many Dodd-Frank requirements, a position at odds with the understanding of the marketplace at large, said Luke Zubrod, director at Chatham Financial. He added that many saw this as CFTC overreach, and the issue likely played a significant role in banks’ decision to sue the CFTC on its cross-border swap guidance.
A bevy of Non-US swap dealers told the regulator’s staff late last fall that “in order to avoid market disruption for their non-US counterparties, such time-limited relief was necessary to allow them to organize their internal policies and procedures to come into compliance …,” according to the CFTC’s June 4 no-action statement, which extends the relief until year-end. An earlier extension in mid-January had extended it to Sept. 15.
“So now we see the CFTC delaying implementation of this guidance” further, Mr. Zubrod said, “And it wouldn’t surprise me if the new chairman gives greater consideration to whether this approach was in fact the right one.”
Timothy Massad, a former senior Treasury Department official, was sworn in as the new CFTC chairman June 5. Mr. Zubrod noted that Acting Chairman Mark Wetjen had noted in a speech before the derivatives, securitization and project finance committee of the bar in Washington, D.C., that he thought the issue was worth revisiting.
“Importantly, I also have directed the Commission staff to develop a rulemaking to set out a process for foreign based swap trading platforms to seek appropriate regulatory treatment under US law,” Mr. Wetjen said. “The Commission also should follow the IOSCO technical committee’s recommendations, where applicable, in developing that framework.”