Current Commodities and Futures Trading Commission (CFTC) proposals on substituted compliance for extraterritorial derivatives regulation are lacking in clarity and risk over-complicating the market, experts have said.
At a meeting last Friday, the CFTC made an eleventh-hour decision to extend its relief on the cross-border application of rules mandated in the Dodd Frank Act. It also promised to use substituted compliance, where it would not seek to apply its rules to US firms operating in jurisdictions with equivalent regulation, which had been a key demand of European regulators and the industry.
However, there has been widespread criticism of the lack of detail regarding how the substituted compliance regime will work.
Commissioner Scott O'Malia, the only Republican left on the commission, was critical of the CFTC's approach and lack of clarity, and said: "The stark reality is that this Commission is not the global regulatory authority and doesn't have the resources to support such a mission. Therefore our best and most effective solution is to engage in a fully transparent discussion on substituted compliance and to do so immediately."
TABB Group's director of fixed income research, Will Rhode, said the CFTC needed to be more willing to discuss its proposals with regulators in other jurisdictions.
"I'm not convinced the agreement reached by the CFTC and European authorities last week was a positive development because there needs to be an elevation of discussions that reflect that US authorities are willing to accept European rules, which ultimately work towards the same G-20 principles," he said.
The key issue that the CFTC needs to resolve is whether it would apply substituted compliance on a rule-by-rule basis covering 13 categories, or whether it would simply approve entire regimes. The latter would be preferable for the industry as differing compliance and reporting processes for each rule would create a significant administrative burden. However, the CFTC staff is thought to prefer the rule-by-rule approach.
CFTC staff have said they are preparing "comparability determinations" for Australia, Canada, the European Union, Hong Kong, Japan and Switzerland to examine whether those jurisdictions have sufficiently similar regulations, though it is not expected that these will be complete until the end of the year.
However, Tabb's Rhode said: "A category-based approach to authorise regulation on a rule-by-rule basis in place of a broader acceptance of rules under substituted compliance could impose greater complexity on the market".
The industry is now eagerly awaiting the publication of the cross border guidance document, which is expected to be published before the end of July. Once this is published in the Federal Register, it will begin a 75-day phase in session, giving the industry less than three months to implement.