The Commodity Futures Trading Commission’s advisory letter issued in November 2013 that extended Dodd Frank Act rules to non-US banks and potentially their non-US customers, didn’t sit well with the US’s regulatory cousins around the world. In January the CFTC extended a no-action relief from the measure until September 15, 2014 and then took the unusual step of requesting more comments.It probably wishes it hadn’t. Comments were due March 10 and regulators of the most active swap markets outside the US, which multinationals frequently access to hedge risk, clearly expressed their dismay.
The Japanese Bankers Association politely noted that it is “unclear” how a swap transaction booked outside the US, even if US-based personnel of a Japanese bank played a role in executing the transaction, would directly or indirectly impact the US financial system. It added that the application of the advisory letter should be limited to transactions booked within the US, and those outside should be “be appropriately regulated by respective national financial regulators.”
The European Commission (EC) was more outspoken. After noting the “close and collaborative relationship” between US and European regulators during the development of their respective swap regulatory reforms, the EC’s letter “urges the CFTC to consider withdrawing the advisory.”
The EC letter provides examples of how swaps booked by a European bank in its London office and following European rules may take advantage of New York-based staff because of its expertise in a certain product or because a corporate client in Latin America wants to complete the transaction after the London office is closed. It then goes on to say that because that staff is physically located in the US, the European bank would have to clear the trade at a US-designated clearing organization (DCO) and confirm and value the trade in the US. “This in spite of the fact there is not counterparty risk for US entities,” the letter states.
The EC letter also complains that despite the G20 leaders’ commitment to defer to each other’s regulatory regimes when the outcomes are similar, the CFTC’s advisory does not appear to provide for that substitutive compliance. In addition, the EC claims the scope of the advisory letter’s application is unclear. “What does it mean to ‘regularly (use) personnel or agents located in the US,” and “What does it mean to ‘arrange, negotiate, or execute a swap,’” the letter asks.
If the complaints of CFTC’s regulatory piers fall on deaf ears, perhaps the concerns of US institutional investors will hold more sway.
“We are concerned about the effect the requirements imposed by the Staff Advisory [letter] would have on non-US investors, many of whom are clients of US asset management firms or of non-US asset management firms with affiliates or personnel in the US,” writes Sanjay Lamba, assistant general counsel at the Investment Adviser Association (IAA).
Indeed, the IAA letter says, a non-US client using a non-US swap dealer may have no expectation at all that it will be subject to US regulation. However, because one of the bank’s staff members advising on the transaction is located in New York, it may suddenly find itself having to comply with Dodd-Frank rules, resulting in additional costs for that client.
Alternatively, non-US swap dealers may have to move personnel from the US to Canada or another location in North America to avoid falling under Dodd-Frank rules, or they may have to hire personnel already located outside the US to work during US market hours to cover the US market.
“We are especially concerned that increased expenses for the swap dealer would ultimately result in increased transaction costs and reduced services for our members’ non-US clients,” Mr. Lamba says, adding, “Further, we are concerned that these issues may cause non-US clients to avoid hiring US asset managers due to perceived impediments involved in dealing with only non-U.S personnel of non-US swap dealers.”