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 risk management.
“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 Commission.
“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.