A lawsuit against chief US derivatives regulator supported by the world’s largest swaps agents seeks to correct what the industry believes is a divergence from the G-20 Pittsburgh agreement and may impact trading on swap execution facilities (SEFs).
The Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association, and the Institute of International Bankers, which together represent some of the largest swap dealers globally, filed a lawsuit in a US federal court seeking to overturn crucial Commission guidance published in July regarding overseas swaps activity.
According to the industry bodies, advisories published in November significantly changed the July guidance that banks were relying on to keep certain swaps deals out of the scope of Dodd-Frank, specifically footnote 513.
Gabriel Suprise, research analyst, JWG Group, a regulatory advisory body, said the underlying issue at hand was the remit of Dodd-Frank.
“The key issue here is that a number of banks, and even CFTC commissioner Scott O'Malia, believe footnote 513 goes against the spirit of the G-20 mandate and is an overreach in terms of Dodd-Frank’s applicability to activity, which should be outside its purview,” he said.
He said the issue could become critical for trading on SEFs, which will intensify when mandatory trading deadlines kick in, likely to take place in February. But, the industry should not expect the CFTC to continue to issue no-action relief for these rules.
“It would be dangerous to for the market to presume there will be temporary relief in the form of no-action letters – we expect these will be issued only if clear, demonstrable economic impact can be proven,” he said.
Under the current guidance issued by the CFTC, a German bank with a branch in the US would be hit with both US and European regulations, instead of the rules of its local base, as was initially envisioned in the G-20 Pittsburgh agreement, Suprise said.
A 14 January deadline related to the 14 November advisory note gives incoming Commissioner only two weeks to address the issue when current chairman Gary Gensler steps down on 3 January.