Concurring Statement of Commissioner Sharon Y. Bowen Regarding Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants
October 11, 2016
The rule proposal we have before us is significant. It addresses a number of important issues including: (i) the “US Person” definition; (ii) the treatment of foreign affiliates of US Persons (“Foreign Consolidated Subsidiaries” or “FCS”); (iii) the application of the de minimis threshold and business conduct standards to non-US registered dealers; and (iv) the treatment of swap trades that are “arranged, negotiated, or executed” in the US by foreign-based dealers but booked elsewhere.
I intend to vote “yes” for this proposed rule. Although I do not agree with every part of the proposal, I believe the proposal and questions lay out the key issues to allow for meaningful comments from the public. In that vein, I strongly urge market participants and members of the general public to comment on this rule proposal before the Commission makes a final decision. Its importance to our overall effort to regulate the swaps market requires us to take special care in considering how average investors and interested citizens feel about this proposal before we decide to finalize it.
I like many aspects of this rule. First, I am happy to see that it largely adopts the US Person and FCS definitions from the cross border margin rule. Whenever possible, we should try to make our rules consistent with each other; so this is a move in the right direction.
Second, it proposes that three important groups: US-based dealers, non-US entities guaranteed by US persons, and FCS – each count all of their swaps – those with US persons and non-US persons – towards the de minimis threshold. It is important that we subject non-US entities guaranteed by US persons, and FCS to this standard, because their swap risks have a material effect on the related US entity, and therefore, poses risks to our US financial system. Thus, it makes sense that we count all of their dealing activity in determining whether they engage in enough dealing to require registration.
However, I especially invite robust comment on certain aspects of the proposal:
Conduit Affiliates: I am concerned that the current proposal does not capture the dealing activity of “conduit affiliates.” A conduit affiliate is (i) a non-US affiliate that is consolidated with a US entity (or where a non-US affiliate and a US entity are consolidated) where there is no ultimate US parent and (ii) which transfers, through back to back swaps, the risk of swaps it enters into with non-US counterparties to that US person. They, in essence, serve as conduits for US entities to engage in, and ultimately assume the risk of, non-US swap activity. One would assume that these conduit affiliates would be captured by our rules and therefore would have to count this activity towards the de minimis threshold. However, this is not the case. That US entity could engage in billions of dollars of swap activity through its conduit affiliate and avoid all of our swap requirements.1 This is a market risk concern. This issue is clearly highlighted in the questions, and I would be very interested in hearing comments about whether we should close this loophole, and require that conduit affiliates count all their trades, in which the risk is transferred to a US dealer, towards the de minimis threshold.
Arranged, Negotiated, or Executed: While I am believe it is good that the proposal requires that all US trading desk personnel of non-US dealers are held to conduct standards, I am not certain that we have gone far enough. Specifically, I encourage comment on whether the dealing activity that occurs in the US with US personnel from the trading desk of a non-US dealer should be counted towards that non-US dealer’s threshold, even though the transactions are between two non-US counterparties and are booked outside the US. The FCS definition rightly requires non-US consolidated subsidiaries with a US parent to count all of their swap dealing activity towards the threshold, regardless of where it is booked. Does it make sense then that non-US dealers can use their US desks to engage in billions of dollars of swap dealing and never have that counted because the swaps are booked elsewhere? Are we, unnecessarily, putting US dealers at a serious competitive disadvantage to other dealers who are doing the very same thing sometimes just a few offices away?2 Moreover, our fellow regulator, the Securities and Exchange Commission has answered “yes” to that question: under their rules, non-US dealers must count security-based swap transactions that are arranged, negotiated or executed by US personnel toward their de minimis threshold.3 Thus, if we choose not to do so, we would not be harmonized with our fellow regulator, which governs an important part of the swaps markets.
For these reasons, and others, I would strongly encourage the public and market participants, particularly our US dealers, to comment on this proposal. Thank you.
1 Also, if we find the jurisdiction where the transaction occurs comparable, none of these swaps would have to be margined either.
2 “Remarks of Chairman Gary Gensler at Swap Execution Facility Conference: Bringing Transparency and Access to Markets” (Nov. 18, 2013), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-152 (“[A] U.S. swap dealer on the 32nd floor of a New York building and a foreign-based swap dealer on the 31st floor of the same building, have to follow the same rules when arranging, negotiating or executing a swap. One elevator bank … one set of rules.”).
3 17 CFR § 240.3a71-3(b)(1)(iii)(C). See also “Security-Based Swap Transactions Connected With a Non-U.S. Person’s Dealing Activity That Are Arranged, Negotiated, or Executed by Personnel Located in a U.S. Branch or Office or in a U.S. Branch or Office of an Agent; Security-Based Swap Dealer De Minimis Exception; Final Rule,” 81 FR 8598 (Feb. 19, 2016).
Last Updated: October 11, 2016