CFTC commissioner calls for interim rules on cross-border swaps

A member of the Commodity Futures Trading Commission is calling for interim guidelines to be completed for cross-border swaps trades over the next few weeks.

A member of the Commodity Futures Trading Commission (CFTC) is calling for interim guidelines to be completed for cross-border swaps trades over the next few weeks.

Commissioner Mark Wetjen today told delegates at the International Derivatives Expo in London that the CFTC needed an interim approach to provide legal certainty in the short-term.

He believed the Commission could have guidelines in place by 12 July, when an exemption to cross-border rules expires. However, Wetjen admitted formal negotiations at the Commission have yet to begin.

"The CFTC should not delay these policy judgments much longer. Global market participants deserve regulatory certainty," he said.

"There is a considerable amount of work to do still, but I think so long as people are flexible and stay focused on what we are really trying to achieve by the way of this guidance, we should be able to do it in that time."

The CFTC issued an exemption order in December, giving foreign companies relief from Dodd-Frank rules until the Commission decided how those rules would apply to companies abroad.

Pressure has been mounting on the CFTC to extend to the exemption, with a group of six US sell-side associations earlier this month sending a letter to CFTC chairman Gary Gensler to extend it by six months. 

The letter joined a similar plea from the European Commission to extend the exemption until greater clarity is developed at the global level through international regulation bodies such as the International Organization of Securities Commissions.

Wetjen said despite a possible introduction of interim guidelines, the CFTC must be willing to revisit the cross-border framework and "remain open to course correction as developments in global and domestic derivative markets dictate".

It was "absolutely essential" that the interim guidelines also be coupled with sufficient adjustment time for the marketplace, he said, meaning exemptions may be extended.

Extending scope

As for what the interim guidance would look like, Wetjen said the CFTC should look at more substantial adjustments to the substituted compliance framework to extend to clearing houses and trading platforms.

"I think there are questions about the scope of substituted compliance, under what circumstances it should be available to foreigners," he said.

Wetjen said he believed a balance could be struck for cross-order swap rules to keep the financial system safe, without balkanising liquidity and risk management.

Last year, CFTC cross-border proposals included substituted compliance guidelines, which allows non-US swap dealers and participants to conduct business by complying with their home regulations, if the rules are comparable to US regulation. However, vital questions remain regarding the definition of 'US person' and differences between entry-level and transaction-level application of the rules. 

Walter Lukken, chairman and CEO of the Futures Industry Association (FIA), said at the conference the CFTC needed to structure its substituted compliance framework in line with the Securities Exchange Commission's (SEC) to form one US approach. 

"Segregation, customer protection, position limits, reporting issues - all of these are occurring in different jurisdictions and would benefit from greater coordination and one voice rather than multiple, " he said.

"The FIA would like to see an extension of the exemption in line with what the SEC is doing and what the European regulators are doing to buy more time."