Statement of Commissioner Dan M. Berkovitz on Comparability Determination for Australia:  Margin Requirements for Uncleared Swaps

March 27, 2019

I support today’s Comparability Determination for Australia: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (“Australia Determination”).

The Commission’s regulations governing margin requirements for uncleared swaps (“CFTC Margin Rules”) help mitigate risks posed by uncleared swaps to swap dealers, major swap participants, and the overall U.S. financial system.[1]  In this regard, the CFTC Margin Rules—and other rules around the world requiring margin for uncleared swaps—are a fundamental component of the regulatory reforms adopted in the wake of the 2008 financial crisis.

In 2016, the CFTC adopted its cross-border margin rule to permit swap dealers and major swap participants located in non-U.S. jurisdictions to comply with the CFTC’s Margin Rules by meeting the similar rules of their home jurisdiction if the Commission has deemed those rules comparable.[2]  This framework for “substituted compliance” supports the global nature of the swaps market and conforms to the directive in the Dodd-Frank Act for the Commission to consult and coordinate with international regulators to establish consistent international standards for the regulation of swaps entities and activities.[3]  The substituted compliance framework helps reduce duplicative and overlapping regulatory requirements where effective comparable regulation exists, facilitates the ability of U.S. market participants to compete in foreign jurisdictions, and is consistent with the principle of international comity.

The CFTC’s cross-border margin rule establishes an outcomes-based approach that considers a number of factors and does not require strict conformity with the CFTC Margin Rules.  As I have said before, a comparability determination should not be based solely on the home country’s written laws and regulations, but also consider the country’s broader system of regulation, including oversight and enforcement.  In addition, the nature of the other country’s relevant markets may be taken into account.  Finally, in considering these issues, the Commission should keep in mind the principle of comity: the reciprocal recognition of the legislative, executive, and judicial acts of another jurisdiction.[4]

The Australia Determination finds the margin requirements for uncleared swaps under Australian laws, regulations, standards, and other materials comparable in outcome to the CFTC’s Margin Rules.  The CFTC staff engaged with staff of the Australian Prudential Regulation Authority (“APRA”), and evaluated prudential standards and other materials provided by APRA to develop an understanding of APRA’s regulatory objectives, the products and entities subject to margin requirements, the treatment of inter-affiliate swaps, and other aspects of APRA’s margin rules.  The in-depth analysis outlined in today’s Australia Determination reflects a holistic understanding by the Commission of APRA’s margin rules and its prudential oversight practices.  The analysis also observes that the CFTC Margin Rules and APRA’s margin requirements for uncleared swaps are not identical.  In a number of instances, APRA’s specific requirements are not as comprehensive as the CFTC’s Margin Rules.  However, the determination explains how mitigating factors—such as certain of APRA’s risk management requirements and differences in the size of the two countries’ swap markets and of the market participants in them—support a determination that the two systems of regulation have similar outcomes.

For example, unlike the CFTC Margin Rule, APRA only requires that variation margin be exchanged between counterparties whose average notional amount of uncleared swaps exceeds a certain threshold.  However, as noted in the determination, Australia’s non-centrally cleared swaps market is highly concentrated in large entities that exceed that threshold, and the large majority of transactions would therefore be subject to variation margin.  Furthermore, as noted in the determination, if an Australian entity that would otherwise be subject to the CFTC Margin Rules, but for substituted compliance, enters into swaps with any U.S. entity covered by the CFTC Margin Rules, then both entities are required to exchange margin under our rules.  This reduces the potential for risks from swap activities overseas finding their way to the United States.

As with other jurisdictions where the legal and regulatory structure does not mirror our own, and the substituted compliance determinations are based on the overall outcome of the regulatory system, subsequent monitoring may be appropriate to confirm that our initial understanding of the regulatory structure and the expected outcomes is accurate.  Accordingly, I encourage the CFTC staff to periodically assess the implementation of this determination to confirm our expectations are accurate.

I thank the CFTC staff for their thorough work on this determination and appreciate their responsiveness to our comments and suggestions.  I would also like to thank my fellow Commissioners for their collaboration in helping us reach this positive outcome.