Ever since the Commodity Futures Trading Commission released its OTC swap rules, it’s heard not only grumblings from the financial community but also from other regulators, particularly those in Asia.
On Wednesday the CFTC sought to quiet those grumblings, sending Commissioner Mark Wetjen out on the hustings to let the world know the CFTC is sensitive to those concerns and will work hard to address them. He told attendees at an International Swaps and Derivatives Association conference that the Commission must be “clear and make measured and workable policy … in our cross-border documents.”
And workability is on the minds of many Asian regulators. A group of them, including those from Australia, recently expressed concern that the new rules will have a big impact on the way they themselves regulate, not to mention raise costs of compliance. In a letter sent to the CFTC in late August, the group of regulators argued that OTC trading reform will create “complexity, cost, fragmentation and risk in international markets.”
“We are concerned that some of the proposed requirements as they currently stand may have significant effects on financial markets and institutions outside of the US,” the group said. “We believe a failure to address these concerns could have unintended consequences, including increasing market fragmentation and, potentially, systemic risk in these markets, as well as unduly increasing the compliance burden on industry and regulators.”
In the meantime, Japanese regulators have flat-out asked the CFTC to exclude it from cross-border enforcement. The Bank of Japan and FSA said they want the CFTC to “reconsider the necessity of extraterritorial application of U.S. derivative regulations including swap dealer requirements to Japanese financial institutions established and conducting business in Japan.”
In his remarks to ISDA, Commissioner Wetjen said CFTC was “fully engaged” on issues related to the definition of “U.S. person,” the conduit test for transaction-level requirements, the aggregation of overseas-dealing activities, and the competitiveness of certain legacy business structures. The attention to the US Person provision may have been the result of many news reports suggesting US firms could be shut out of Asia OTC markets because participants wouldn’t want to deal with the headache of US compliance.
The CFTC has proposed a substituted compliance provision – i.e., a provision that gives deference to local regs — to deal with the concerns of regulators outside of the US. And indeed, said Commissioner Wetjen in his remarks, given the limited resources of the CFTC, being able to rely on others’ regulations and enforcement is welcome. Substituted compliance “must be a central tenet of the Commission’s cross-border approach.”
Commissioner Wetjen stressed that the CFTC will work to clarify the issues going forward and was confident the Commission’s final releases “will be able to answer clarify many of the relevant questions and concerns raised in the comment letters on these issues.”