US watchdog reaches substituted compliance verdict

The Commodity Futures Trading Commission has finalised substituted compliance determinations for six key jurisdictions.

By None

The Commodity Futures Trading Commission (CFTC) has finalised substituted compliance determinations for six key jurisdictions.

The US regulator on Friday announced regulations in Australia, Canada, the European Union, Hong Kong, Japan and Switzerland are deemed compatible with certain swap provisions of the Dodd-Frank Act. 

The move allows non-US dealers and non-US major swap participants in those jurisdictions to use compliance with their local regulators as a substitute to CFTC rules. The guidelines were approved by three CFTC commissioners. 

“These determinations reflect the Commission’s commitment to coordinating our efforts to bring transparency to the swaps market and reduce its risks to the public,” CFTC chairman Gary Gensler said.

“The comparability findings for the entity-level requirements are a testament to the comparability of these regulatory systems as we work together in building a strong international regulatory framework.”

The Commission also approved substituted compliance for a number of key transaction-level requirements for the EU and Japan, and is issuing comparability determinations for transaction-level requirements for the EU.

The EU, in conjunction with the US, holds the bulk of the global OTC derivatives transactions and in July agreed with the CFTC to work close together in developing coherent rules, including a planned January meeting to iron out key cross-border issues. 

The CFTC can extend no-action relief or issue guidance on which rules will be permitted under substituted compliance and which must follow CFTC rules. It is expected to break down specific areas each jurisdiction must amend, or face subjection to CFTC rules for entities dealing with US counterparts

PJ Di Giammarino, CEO of JWG Group, a regulatory advisory body, said alignment at a more granular level was needed compared to the agreed upon principles to ensure the global OTC derivatives market functions correctly. 

“Regulators have realised the enormity of technical difficulty inherent in keeping rules common across different cultural perspectives, business methods, tax regimes, legal frameworks and languages,” he said.

“Overall we are in pretty choppy waters that will get worse unless we figure out how to get the basic principles aligned at a greater level of detail,” he said.

The key cross-border issues also occur at a time of leadership change within the CFTC. Commissioner Mark Wetjen, who will step in as acting chairman between Gensler’s departure and Timothy Massad’s arrival, will also take on the role of sponsor for the Commission’s Global Markets Advisory Committee – a body set up to discuss competitive and regulatory issues facing US interests globally, which includes meeting with other regulators. However, agreement on cross-border rules in greater detail may apply only to specific areas.