A number of Asia-Pacific financial regulators have added
their voices to growing international concerns that new US swaps regulation will increase
systemic risk in their own markets and unduly increase the compliance burden on
industry and regulators.
In an open letter to the Commodity Futures Trading
Commission (CFTC), five Australian, Singaporean and Hong Kong watchdogs have
articulated fears over the way the agency has proposed to handle the cross-border
application of swap rules in the Commodity Exchange Act.
Under the new rules – which sit within the Dodd-Frank Act and
are designed to comply with G-20 recommendations to reduce systemic risk in OTC
derivatives trading – non-US banks trading with US counterparties will have to register
in the US as swap dealers and abide by CFTC rules on capital requirements and
“Affected non-US persons will have to comply with two sets
of regulations, which may be overlapping and conflicting, imposed by the US and
individual non-US regimes,” the regulators’ joint submission read. “This is
compounded by the lack of clarity and specificity in a number of areas of the proposed
guidance [on the new rules].”
The letter was signed by the Australian Securities and
Investments Commission, Hong Kong Monetary Authority, Monetary Authority of
Singapore, Reserve Bank of Australia and Hong Kong’s Securities and Futures
“Potential market disruption or fragmentation, with consequently
increased risks to systemic stability and market liquidity in our markets, may
arise as market participants may have to change their business models or even
withdraw from certain businesses, all within a relatively short period of time,”
the regulators said, adding the impact from the expected increase in compliance
costs and likely reduction in OTC derivatives liquidity “should not be under-estimated”.
How the rules define a “US person” has also come under sharp
criticism from the regulators who believe it is too broad.
“We note that the proposed definition of ‘US person’ is
high-level and different from that used in other [US] regulations,” the
regulators wrote, requesting more guidance and transitional arrangements. “Market
practitioners have also highlighted that it is not easy to identify if a
counterparty is a US person.”
Last week Japan’s Financial Services Agency urged the CFTC
to defer its extraterritorial OTC rules over similar
fears of international overlap and conflict. In line with the Singaporeans,
Australians and Hong Kong Chinese, Tokyo 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 Asia-Pacific
regulators all want the CFTC to make clear the details of what substituted
compliance means, including due process and timing.