CFTC confirms cross-border swaps relief

The US Commodity Futures Trading Commission will provide temporary relief through no-action letters on the cross-border application of Dodd-Frank Act swaps rules as part of a cooperation accord with European regulators.

The US Commodity Futures Trading Commission (CFTC) will provide temporary relief through no-action letters on the cross-border application of Dodd-Frank Act swaps rules as part of a cooperation accord with European regulators.

Following mounting pressure to further extend a cross-border exemption to rules under Title VII of Dodd-Frank, the Commission responded on Thursday by outlining its cross-border approach and guaranteeing no-action relief before the 12 July expiry of the exemption order.

A no-action letter will be issued to firms subject to both Dodd-Frank and the European market infrastructure regulation (EMIR), stating that, "where a swap is subject to joint jurisdiction under US and EU risk mitigation rules, compliance under EMIR will achieve compliance with the relevant CFTC rules," the CFTC statement read.

The deal effectively means EU-registered market participants and market infrastructure providers - such as clearing houses - will continue to have US market access until the end of 2013.

Despite the statement to provide no-action relief, definitive cross-border guidance and substituted compliance rules are yet to emerge, although the CFTC has stated its intent to recognise similar rules in Europe.

"Recognising the high degree of similarity that already exists between our respective requirements, we seek to address conflicts of law, inconsistencies, and legal uncertainty that may arise from the simultaneous application of EU and US requirements," the CFTC statement read.

The statement said that for foreign entities not affiliated with or guaranteed by US persons, transaction-level requirements of Dodd-frank would apply only when dealing with US persons or their foreign affiliates.

The CFTC and European Commission will meet in January to evaluate progress on establishing more harmonised cross-border rules under the 'Path Forward' initiative announced today.

Regarding the mandatory clearing rules, the CFTC and European Commission agreed a 'stricter-rule-applies' principle to cross-border transactions for rules that may exist in one jurisdiction but not another, to avoid regulatory arbitrage.

Gary Gensler, chairman of the CFTC, said: “With these joint understandings, together, we’ve taken another significant step in our mutual journey to bring transparency and lower risk to the swaps market worldwide."

Calls for clarity

In recent months, the CFTC has faced growing pressure to extend an exemptive order for cross-border transactions ahead of final rules.

Two letters sent on Wednesday and seen by to influential senators and the US Treasury were the latest in a widespread and often coordinated campaign to petition the CFTC.

A letter from the Subcommittee on General Farm Commodities and Risk Management, signed by 14 congressmen, requests that US Treasury secretary Jacob J. Lew use his role as chairman of the Financial Stability Oversight Council (FSOC) to resolve issues of cross-border application of Dodd-Frank to provide stability to the market.

"We ask that you direct the FSOC to step in and resolve the significant uncertainty created in the marketplace by the CFTC's inability to address concerns with tits proposed guidance," the letter read.

The letter describes as "alarming" the CFTC's inability to coordinate with its fellow US regulator overseeing Dodd-Frank implementation, the Securities and Exchange Commission (SEC), a theme taken up by industry bodies in another letter also sent Wednesday.

Leading derivatives trade bodies sent the letter to influential members of the two Senate subcommittees that respectively govern the CFTC and SEC, calling for the CFTC to align its cross-border approach to that of the SEC.

"Rushed efforts to finalise more permanent cross-border guidance before 12 July, would have avoidable consequences for US competitiveness and business certainty," the letter, signed by 13 trade bodies, read.

Speaking to, Sean Owens, principal at consultancy Woodbine Associates, said harmonising the two US regulators' approach to extraterritorial issues under Dodd-Frank was vital.

"It's critical that the SEC and CFTC find common ground on substituted compliance to bring stability to the industry," Owens said.

"The situation so far has been less than comfortable for firms which are caught between wanting to be prepared and wanting to wait until the rules are finalised before making any wholesale changes."

Owens said the push to develop final rules would most benefit the market if done in collaboration with both the SEC and foreign jurisdictions.

"Foreign jurisdictions are behind the US in terms of developing final rules for swaps trading and that could lead to regulatory arbitrage, but the substituted compliance rules need to focus on maintaining the spirit of Dodd-Frank globally," he said.