Supporting Statement of Commissioner Brian D. Quintenz on the Comparability Determination for Australia: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants

March 27, 2019

I support the issuance of the Margin Comparability Determination for Australia (Determination).  As I have noted previously, in order to avoid market fragmentation and an unworkable, complex patchwork of cross-border regulations, the Commission must apply a holistic, outcomes-based approach to substituted compliance.  The Commission should assess comparability by determining if the totality of a legal regime’s regulations, guidance, and supervisory approach achieve comparable outcomes to the CFTC’s regime, instead of engaging in a rule-by-rule analysis for identical requirements.

I support today’s Determination which applies such a holistic approach and respects the sovereignty of another jurisdiction to implement important G-20 reforms, such as margin, as it deems appropriate.  Moreover, the Australian Prudential Regulation Authority (APRA) has already found CFTC margin regulations to be comparable to its own, so I am pleased that the determination adopted by the Commission today appropriately reciprocates that finding.

The outcomes-based approach of today’s Determination appropriately accounts for modest regulatory differences between the CFTC and Australian margin regimes.  For example, although CFTC rules require initial margin to be segregated at a third party custodian, the Australian framework allows initial margin to be segregated at a third party custodian or held in some other bankruptcy-remote manner, such as the use of a trust account.  The end result of both custodial arrangements is the same, however, because in the event of bankruptcy, the posting party’s assets are protected.  The Determination today recognizes that other regimes can achieve the same overarching policy goals as the CFTC’s regulations, although they do so by different means.

Like the recently amended Comparability Determination for Japan regarding margin for uncleared swaps, the Determination before us today also limits the flow of risk back to the United States.  This is because under the Commission’s Cross-Border Margin Rule, when a U.S. swap dealer enters into an uncleared swap with an Australian swap dealer or end-user, it is required to collect initial margin and variation margin must be exchanged.  In the case of uncleared swaps between affiliated U.S. and non-U.S. swap dealers, variation margin is always required.  In light of these safeguards, I do not believe that the Determination today will result in systemic risk being “backdoored” into the United States.

Since the Commission first began issuing comparability determinations in 2013, we have made substantial progress toward formalizing cooperative arrangements with our international counterparts through supervisory Memorandums of Understanding (“MOUs”).  MOUs facilitate information sharing and cooperation between regulators with a shared interest in supervising cross-border firms.  Importantly, we have an active MOU with APRA and I know we will continue to coordinate closely to ensure appropriate oversight over our respective regulated entities.[1]  Through deference and engagement, the Commission can work alongside other regulators to ensure a well-regulated, liquid, global swaps market.