I am very pleased to support today’s final rule interpreting Congress’ statutory directive that the Commission may only regulate those foreign activities that “have a direct and significant connection with activities in, or effect on commerce, of the United States.”[1]  As I noted when I supported the proposal last December, Congress deliberately placed a clear and strong limitation on the CFTC’s extraterritorial reach, recognizing the need for international comity and deference in a global swaps market.[2]  Today’s rule provides important safeguards to the US financial markets in delineating which cross-border swap activity must be counted towards potential registration with the Commission, and which transactions should be subject to the CFTC’s business conduct requirements for swap dealers (SDs) and major swap participants (MSPs).  At the same time, the final rule appropriately defers to foreign regulatory regimes to avoid duplicative regulation and disadvantaging U.S. institutions acting in foreign markets.

Today’s rule achieves the goals for cross-border regulation that I articulated in a speech before the ISDA Annual Japan Conference in October of last year.[3]  I stated that each jurisdiction’s recognition of, and deference to, the sovereignty of other jurisdictions is crucial in avoiding market fragmentation that poses serious risks to the liquidity and health of the derivatives markets.  This rule properly grants deference to other jurisdictions by limiting the extent to which non-US counterparties must comply with significant aspects of the CFTC’s regulatory framework for SDs and MSPs and by providing market participants with the opportunity to comply with local laws that the Commission has deemed comparable to the CFTC’s regulations (“substituted compliance”).

Substituted Compliance

As I noted with respect to the proposal, substituted compliance is the lynchpin of a global swaps market, and the absence of regulatory deference has been the fracturing sound we hear when the global swaps market fragments.  The final rule provides a framework for substituted compliance with respect to two sets of regulations, “group A” entity-level requirements, such as conflicts of interest policies and a risk management program, and “group B” transaction-level requirements, such as daily trading records, confirmation, and portfolio reconciliation.  While the Commission has issued substituted compliance determinations for entity-level requirements in six jurisdictions and for transaction-level requirements in two jurisdictions, they all contain exceptions for particular provisions of the Commission’s regulations, and one of the transaction-level determinations partially addresses only two of the five regulations in group B.[4] 

Today’s rule provides for a flexible, outcomes-based framework for future comparability determinations that will assess the goals of the Commission’s regulations against the standards of its foreign counterparts’ regimes, instead of directing the Commission to focus on a rigid line-by-line or even regulation-by-regulation comparison.[5]    More specifically, and a primary reason for my support of this final rule, under this new framework, the Commission can compare the goals of its regulations to the outcomes of foreign regulations on an entire group-wide basis, so that the standards of a foreign regime will be considered holistically compared to the goals of all the Commission’s either group A or group B requirements. 

Additionally, this final rule allows the Commission to proactively assess and issue comparability determinations without waiting for a request from a jurisdiction. I recognize that several G-20 jurisdictions have made significant progress in the area of issuing transaction-level requirements, as evidenced by a recent report by the Financial Stability Board (FSB).[6]  I hope that the Commission will soon issue additional substituted compliance determinations in order that foreign firms registered as SDs with the Commission, as well as foreign branches of US SDs, can gain the efficiencies of complying with local laws for many of their transactions with non-US persons.[7]  Ideally, future determinations will provide for comprehensive, holistic substituted compliance in a particular jurisdiction for all transaction-level requirements in the CFTC’s group B.

ANE

Today’s rule properly eliminates the possibility that a non-US SD be required to follow many of the CFTC’s transaction-level requirements for a swap opposite a non-US counterparty if US-based personnel of that SD “arrange, negotiate, or execute” (ANE) the swap.  This action brings to a close almost seven years of uncertainty, beginning with the misguided DSIO Advisory of November 2013.[8]  I note that the staff’s no-action letter issued this week suspends enforcement of ANE with respect to transaction-level requirements not covered by today’s rule, specifically in the areas of real-time reporting of swaps to data repositories and the clearing and trade execution requirements, pending future Commission rulemakings that address these rules in a cross-border context.  I expect the Commission will issue such rules in the near future in order to provide the marketplace with legal certainty in these areas and formally dispense with the ANE construct, just as it has with respect to the requirements addressed today.  I believe strongly that ANE has no place with respect to real-time reporting, the clearing requirement, or the trade execution requirement, just like it has no place with respect to the business conduct regulations.

US Guarantees and SRS

Another important element of today’s rule is that it only requires two, clearly defined classes of non-US entities to count all of their swaps towards the Commission’s SD and MSP registration thresholds, and to generally comply with the Commission’s SD and MSP rules if registered.  The first is an entity whose obligations to a swap are guaranteed by a US person, under a standard consistent with the Commission’s cross-border rule for uncleared swap margin requirements.[9]  The second is an entity deemed a “significant risk subsidiary” (SRS) of a US firm.  It is very important that subsidiaries of US bank holding companies, including intermediate subsidiaries, are carved out from the SRS definition.  Those firms are subject to supervision by the Federal Reserve Board, and, therefore, it does not make sense for the CFTC to deploy its precious resources to regulating those entities. 

Helping US SDs’ Foreign Branches Compete

Today’s rule properly makes substituted compliance available for group B requirements to a foreign branch of a US SD similarly to how substituted compliance is available for many non-US SDs registered with the Commission.  I expect that this will help these branches compete with local institutions in that they will be subject to the same rules.  For example, the Commission has already granted substituted compliance to EU regulations with respect to certain group B regulations.[10]  As a result, both the EU branch of a US firm registered with the Commission as an SD and an EU firm registered as an SD could comply with many of the same EU rules for swaps with a US person or with a non-US person that is either US-guaranteed or an SRS registered as an SD or MSP (“swap entity SRS”).  Moreover, under the “limited foreign branch group B exception,” the foreign branch of a US firm would be excused from complying with any group B rules, subject to a 5% notional cap, for a swap with a non-US person that is neither US guaranteed nor a swap entity SRS.  However, if substituted compliance has been provided in a jurisdiction, then instead of being excused from the group B rules for those swaps, the foreign branch would have to comply with the local rules.  Due to the fact that neither of the transaction-level determinations granted comparability for all of the group B requirements, with respect to those requirements not subject to a substituted compliance determination, the foreign branch may either comply with CFTC regulations or count the notional value of the swap towards its 5% limited group B exception.  Clearly, the rules favor the possibility of substituted compliance, pursuant to which a foreign branch of a US firm would have no limitation in following local rules.  I believe that group-wide comparability determinations, without any exceptions, would simplify this situation and make more consistent the treatment of US dealer’s foreign branches and their local competitors.

In conclusion, I am very pleased to have been a part of the Commission that accomplished this major milestone in a long road of issuing final regulations in the area of cross-border swaps oversight.  I would like to thank the staff of the Division of Swap Dealer and Intermediary Oversight for all of their work in completing this final rule and to Chairman Tarbert for his leadership on this important issue.