Japan urges CFTC to defer extraterritorial OTC rules
Japan’s financial watchdog and central bank have implored
the Commodity Futures Trading Commission (CFTC) to hold off for at least a year
on applying cross-border OTC derivatives regulations for fears of international overlap and conflict.
In line with the G20 countries’ commitments to reduced
systemic risk in financial markets, the Dodd-Frank Act and corresponding
Japanese regulation aims to push as large a portion of OTC derivatives trading
onto exchange-like platforms and clear them through central counterparties.
But OTC derivatives regulation in the Dodd-Frank Act arguably
has more extraterritorial reach than the regulations of most G20 jurisdictions,
aiming to limit risks emanating from an overseas entity of a financial group which
could directly flow back to the whole group by requiring registration of US
persons outside the US and the registering of any transactions non-US persons
have with US persons, no matter where in the world they are.
In a joint letter to CFTC chairman Gary Gensler, Bank of
Japan executive director Hideo Hayakawa and Financial Services Agency (FSA) vice
commissioner for international affairs Masamichi Kono said they were concerned such
rules created overlapping and conflicting regulation.
“We urge the Commission to consider deferring the
application of its regulations on cross-border transactions until an
internationally consistent approach on how to address cross-border regulation
of OTC derivatives would be developed (e.g. for at least one year and
renewable, if necessary),” wrote the Japanese regulators.
Hayakawa and Kono have asked Gensler for a deferral of the
application of CFTC regulations with respect to non-US persons and specifically
“CFTC regulations, including swap dealer registration
should, as a matter of principle, not be applied to Japanese financial
institutions established and conducting businesses in Japan,” read the letter.
“Even if Japanese financial institutions would be required to register as swap
dealers under limited circumstances, these requirements should be the least
onerous, and a sufficient preparation period needs to be ensured.”
Substitution stay of
Tokyo has also asked for an extension of the application of
substituted compliance, whereby firms won’t have to directly comply with CFTC
rules if they comply with a comparative regime. The central bank and FSA want
the CFTC to make clear the details of what substituted compliance means,
including due process and timing.
“While we welcome [substituted compliance], we have two
concerns in this regard. The first concern is that the scope of application of
substituted compliance is too narrow. We request it to be further extended, so
that overlap or conflict with Japanese regulation could be avoided as much as
possible,” wrote the Japanese regulators. “The second concern is that the
details, including the procedure and implementation timeline of ‘substituted
compliance’ are not clear in the proposal.”
While the CFTC has proposed to make comparability
determinations on an individual requirement basis, such as mandatory clearing
and trade execution facility, rather than the foreign legislative/regulatory
regime as a whole, Tokyo has asserted the determination should be on a
country-by-country basis, in a comprehensive manner from the viewpoint of
whether or not foreign regulation is broadly in alignment with US regulation
and consistent with the overall objectives of the G20 commitments.
The FSA and central bank also want the CFTC to exclude
certain transactions from the calculation of swap transactions in regard to the
de-minimis threshold for non-US persons.
Dodd-Frank says foreign entities engaging in swap dealing
transactions with US persons at less than the de-minimis level would not be
required to register or be regulated as swap dealers.
But Hayakawa and Kono transactions between non-US affiliates
of non-US persons under common control and US persons, as well as transactions
between US branches of non-US persons and US persons, should not be included in
the de-minimis threshold calculation.
The request from Tokyo is not the first time Japanese market
supervisors have raised concerns over the effects of US regulation. In February,
Japan was one of a number of countries raising
fears the so-called Volcker rule ban on prop trading by deposit-taking
institutions would adversely impact foreign bond markets.