Commodity Futures Trading Commission’s Scott O’Malia is working hard to make sure all global regulators get along. In recent remarks, the CFTC commissioner told an audience at the Global Forum for Derivatives Markets that he hoped recent cross-border squabbles can be “mitigated through a transparent, structured, and consistent process for the Commission’s substituted compliance determinations.” This, he said, was crucial to the rules coordination effort and will be able to “take credit for choosing the path of regulatory harmonization over the path of regulatory imperialism.”
It’s no understatement the “cross-border” is becoming an unwelcome phrase, particularly as it relates to regulation. Recently the UK has been bristling at European telecommunications rules that may make landfall on its shores. And Europe and Asia aren’t really all that happy about FATCA, the US’s grand idea to make sure Americans everywhere in the world are paying their fair share in taxes. And now, the world is once again stiffening at the prospect of CFTC’s overreach on international derivative rules.
The latest hotspot is in swap execution facilities or SEFs. According to Financial Times, some overseas companies would rather not have US customers if they are forced to go by US rules. Just this week, the FT said, CFTC Chairman Gary Gensler was told US banks could be kicked off platforms based in London. One firm, interdealer broker, ICAP, wants out of the rules completely. The FT even quoted someone saying ICAP told US customers they’d have to “clear out by October 2” because of the CFTC rules which would require any trading platform to go by US rules.
But Commissioner O’Malia is on a mission to stamp out the discord. His idea is more transparency by the CFTC. Sunlight is the best disinfectant, he said in his remarks, quoting former Associate Supreme Court Justice Louis Brandeis. Therefore, the CFTC must open up and let the sunshine, or in this case world regulators, in.
“It was and remains my hope that the previous policy overreach that occurred through the expansive cross-border guidance can be mitigated through a transparent, structured, and consistent process for the Commission’s substituted compliance determinations, a crucial element of the harmonization effort,” Mr. O’Malia said.
The substituted compliance process means that companies can adhere to local rules which would then mean they do not need to also comply with CFTC rules. Transparency in this process would go a long way toward smoothing the ruffled feathers. It would “allow us to better understand how our rules and theirs will work and to minimize the likelihood of regulatory retaliation and inconsistent, duplicative, or conflicting rules.”
Footnote 88
In his speech Mr. O’Malia also brought up Footnote 88, a “troublesome issue” which will require “existing multiple-to-multiple swap trading venues to register as SEFs, even if they only offer products that are not yet subject to the trade execution mandate.”
This has caused a bit of a bum’s rush as trading venues offering products like non-deliverable forwards and foreign exchange options are hurrying to get registration applications completed before October 2. That also means that those planning on trading on an SEF would have to code and test the various SEFs before the start, most of which were probably slapped together in order to meet the deadline. Because of this rushed environment and the risks it will create, SIFMA has called for the rules to be delayed until April 2014.