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From Securities Regulation Daily, December 5, 2013

Securities and banking groups challenge CFTC cross border derivatives guidance

By Jim Hamilton, J.D., LL.M.

Securities and banking regulators filed a legal challenge in federal district court to the CFTC’s cross-border derivatives guidance and policy statement that was published in July 2013. The lawsuit alleges that the CFTC failed to follow key requirements mandated by law with regard to development and issuance of the cross-border guidance. The action was filed by SIFMA, ISDA, and the Institute of International Bankers. The associations allege that the CFTC circumvented the requirements of the Administrative Procedure Act and the Commodity Exchange Act by characterizing its regulations as "guidance" and failed to conduct any cost-benefit analysis. The Commission also imposed a series of rules that are contrary to the spirit and the letter of international cooperation, and may harm global markets.

The CFTC guidance introduces the concept of substituted compliance under which the CFTC would defer to comparable and comprehensive foreign regulations. The CFTC proposes to permit a non-U.S. swap dealer or non-U.S. major swap participant, once registered with the Commission, to comply with a substituted compliance regime under certain circumstances. Substituted compliance means that a non-U.S. swap dealer or non-U.S. major swap participant is permitted to conduct business by complying with its home regulations, without additional requirements under the Commodity Exchange Act.

While the associations support vigilant regulation of the derivatives markets to improve transparency and mitigate systemic risk, they feel compelled to bring this action to stop what is proving to be an unceasing effort by the Commission to regulate the global swaps markets through unpredictable guidance documents, advisories, and directives. The action is intended to force the CFTC instead to abide by the requirements for rulemaking laid down by Congress.

The associations also contend that the Cross-Border Rule could undermine the global commitment to coordination and lead to such conflicts in several ways. For example, a firm could be required to execute the same trade on two different platforms and to clear the same transaction on two different clearinghouses. Transactions could be required to be reported in two jurisdictions. The Cross-Border Rule could further create significant administrative, legal, and financial costs for market participants with no apparent benefits. The associations pointed out that the SEC has appropriately acknowledged the importance of coordination in its substituted compliance approach to cross-border swaps rulemaking for securities-based swaps. CFTC relief provided thus far is inadequate in scope and/or time limited, leaving critical uncertainties pending.

As a result of the confusing process around the development of the Cross-Border Rule and the CFTC's lack of coordination with the SEC or foreign regulatory bodies, noted the associations, non-U.S. counterparties have become increasingly reluctant to transact with U.S.-based dealers or even with non-U.S. dealers that have U.S. personnel involved in the transaction.

MainStory: TopStory Derivatives Swaps ExchangesMarketRegulation

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