Amidst a flurry of swap-related announcements moving into the new year, US regulators gave foreign banks a breather to realign their personnel and avoid subjugation to US rules, after providing more flexibility—if also more work—to comply with those rules.
The Commodity Futures Trading Commission issued a no-action letter Jan. 3 that gives swap dealers registered with the commission but based outside the US until November 14, 2014 to comply with rules requiring transactions conducted outside the US but coordinated with US-stationed personnel to comply with the Dodd-Frank Act.
Compliance with those rules was actually scheduled for Dec. 21. The tardy no-action letter illustrates the market’s confusion related to applying Dodd-Frank’s swaps cross-border guidance, said Luke Zubrod, director of risk and regulatory advisory at Chatham Financial. The CFTC has issued numerous no-action letters and rule clarifications over the last year, in one instance clarifying that the involvement of US bank personnel would trigger Dodd-Frank Compliance.
“That was inconsistent with how the market had interpreted the CFTC’s rules and intent, and the market really wasn’t set up to apply those rules to what banks understood to be foreign transactions,” Mr. Zubrod said, adding that the industry’ concerns emerged at the eleventh hour, as the rule’s effective date approached, and prompted the regulator to take action.
The actual rule seeks to thwart banks that for all practical purposes are based in the US but book swap transactions outside the US to avoid Dodd-Frank requirements. However, said Mr. Zubrod, banks may have had valid reasons for taking that approach, such as the necessity to use a highly rated counterparty that may only be available outside the US Or, for operational reasons, a non-US bank may station swap-related staff in New York—a major financial center—to coordinate trades at various entities around the globe.
“So now they can realign their businesses in light of the later implementation deadline,” Mr. Zubrod said. Had the implementation deadline not been delayed, even European companies with no connection to US financial markets could have found themselves falling under the reach of Dodd-Frank, if swap transactions they conducted with European bank in any way involved a trader located on a desk in New York.
“These European entities would have to pay attention to and comply with Dodd-Frank rules, even though their transactions have only the most tenuous connection to US law,” Mr. Zubrod said, adding such requirements could include reporting to a swap data repository and even clearing transactions.
The no action letter follows a flurry of CFTC announcements providing clarification or relief to very narrowly defined groups of market participants and transactions. On Dec. 20, however, the commission approved “comparability determinations” for six jurisdictions outside the US that allow swap dealers and major swap participants to substitute their own jurisdiction’s rules for the comparable Dodd-Frank rules they would otherwise be subject to.
The commission issued determinations for a broad range of requirements at the business entity level, working with authorities in Australia, Canada, the European Union (EU), Hong Kong, Japan and Switzerland. In the EU and Japan it also approved substituted compliance for a number of important transaction-level requirements.
The determinations give non-US banks and their non-US corporate customers more flexibility in terms of compliance, but with strings attached. “For corporates it adds complications to cross border transactions,” Mr. Zubrod said. “They’ll have to wade through the determinations to understand whose rules apply and under which situations.”