The Futures Industry Association and the Securities Industry and Financial Market Association have set out recommendations for improving US access to international swap markets in a recently published white paper.
Currently, US firms have not been able to access non-US swap trading venues or central counterparties unless the Commodity Futures Trading Commission makes a case-by-case assessment of the relevant regulatory frameworks in Europe or Asia to determine whether to defer to home country regulators. This approach has led to several problems for US swap dealers and their customers and has resulted in the fragmentation of international swap markets into separate pools of liquidity.
FIA and SIFMA welcome the Commodity Futures Trading Commission’s recent announcement allowing an exemption for certain European derivative trading platforms based on recognition of comparable regulation by the European Commission. FIA and SIFMA strongly support the decision to grant this exemption but believe that more should be done to build on the CFTC’s work and fully address the problem of market fragmentation at the global level.
As CFTC Chairman Christopher Giancarlo said in recent Congressional testimony, the CFTC’s implementation of the swaps trading provisions of the Dodd-Frank Act have driven market participants away from transacting with U.S. entities, leading to the fragmentation of global markets "into a series of distinct liquidity pools that are more vulnerable to market shocks."
FIA and SIFMA agree with Chairman Giancarlo's assessment and have put forward this white paper to help address this problem of market fragmentation in a more comprehensive way. In their white paper, FIA and SIFMA propose a revised approach that is clear and predictable, consistent with Dodd-Frank, and founded on the CFTC's tried and true approach to regulating U.S. access to non-US futures markets.
Under this approach, a non-US swap trading venue or CCP would not be required to register with the CFTC, or obtain an exemption from registration, unless it a) permitted direct, un-intermediated participation by a US person (other than foreign branches of US banks), or b) directly solicited such U.S. participation. In addition, US firms subject to mandatory trading and clearing requirements in Dodd-Frank could not use a non-US trading venue or CCP to satisfy those requirements, unless that venue or CCP was registered with the CFTC or exempt from such registration.
FIA and SIFMA believe that now is the time for the CFTC to adopt a comprehensive framework to regulate cross-border trading and clearing of swaps. The requirements of Dodd-Frank have been in effect for several years and the CFTC is well positioned to review those requirements and consider their real-world consequences.
"Dodd-Frank has been the law of the land for more than seven years," commented SIFMA President and CEO Kenneth E. Bentsen, Jr. "The time has come to stop rushing from one deadline to the next and, rather, develop a consistent and comprehensive solution to the challenges of cross-border trading that will stand the test of time."
The revised approach proposed in the FIA-SIFMA white paper is designed to meet the public policy goals of Dodd-Frank—reducing systemic risk and protecting US customers—while also expanding the opportunities for US customers to access non-U.S. markets for their hedging and investment needs. This approach also will make more efficient use of the CFTC's regulatory resources and avoid incentives for foreign regulation of U.S. markets.
"As Chairman Giancarlo said when he announced his Project KISS initiative earlier this year, the time is right for a comprehensive review of the CFTC's rulebook to make sure that it is fostering economic growth and encouraging responsible innovation," said FIA President and CEO Walt Lukken. "We hope Chairman Giancarlo will consider our white paper on cross-border regulation as a contribution to this important initiative."
