Introduction and Overview

Today, by approving a final rule addressing the cross-border application of the registration thresholds and certain requirements applicable to swap dealers (“SDs”) and major swap participants (“MSPs”) (the “Final Rule”), the Commodity Futures Trading Commission (“CFTC” or “Commission”) overlooks Dodd-Frank Act[1] purposes, Congressional mandates thereunder, an opinion of the D.C. District Court,[2] and multiple comments raising significant concerns.  The Commission instead relies on broad deference that opens a gaping hole[3] in the federal regulatory structure.  I cannot support a decision to jettison a cross-border regime that has not proven unreasonable, inflexible, or ineffective in favor of an approach that fails to address the most critical concerns that the Dodd-Frank Act directed the CFTC to address in favor of “more workable”[4] solutions.  As the Final Rule opts to address the conflicts of economic interest between the regulated and those who are advantaged by it[5] by usurping Congressional (and congressionally delegated) authority to rethink section 2(i) of the Commodity Exchange Act (“CEA” or “Act”) via prescriptive rules, I must respectfully dissent.

Almost ten years ago to the day, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act as a legislative response to the 2008 financial crisis.  Driven by a series of systemic failures, the crisis laid bare that the essentially unregulated and unmonitored over-the-counter derivatives or “swaps” markets were not the bastions of efficiency, stability, and resiliency they were thought to be.[6]  Title VII of the Dodd-Frank Act gave the Commission new and broad authority to regulate the swaps market to address and mitigate risks arising from swap activities.[7] 

Although much of the over-the-counter derivatives market’s contributions to the 2008 financial crisis completed their journey within the continental U.S., the risk originated in foreign jurisdictions.[8]  Accordingly, Congress provided in CEA section 2(i) that the provisions of Title VII, as well as any rules or regulations issued by the CFTC, apply to cross-border activities when certain conditions are met.[9]

The D.C. District Court recognized that “Section 2(i) operates independently, without the need for implementing regulations, and that the CFTC is well within its discretion to proceed by case-by-case adjudications, rather than rulemaking, when applying Section 2(i)’s jurisdictional nexus.”[10]  The D.C. District Court also found that, because the Commission was “not required to issue any rules (let alone binding rules) regarding its intended enforcement policies pursuant to Section 2(i),” the CFTC’s decision to issue the Guidance as a non-binding policy statement benefits market participants.[11]  To the extent the CFTC interpreted the meaning of CEA section 2(i) in its 2013 cross-border Guidance, an interpretation carried forward in the Final Rule today (and in its proposal), such interpretation is permissibly drawn linguistically from the statute and, regardless, cannot substantively change the legislative reach of section 2(i) or the Title VII regime.[12]  In this regard, the interpretation reinforces the direct meaning of CEA section (2)(i)’s grant of authority—without implementing regulations—to enforce the Title VII rules extraterritorially whenever activities “have a direct and significant connection with activities in, or effect on, commerce of the United States.”[13]  Putting aside the anti-evasion prong in CEA section 2(i)(2), it remains that CEA section 2(i) applies the swaps provisions of the CEA to certain activities, viewed in the class or aggregate, outside the United States, that meet either of two jurisdictional nexuses: (1) a direct and significant effect on U.S. commerce; or (2) a direct and significant connection with activities in U.S. commerce, and through such connection, present the type of risks to the U.S. financial system and markets that Title VII directed the Commission to address.[14]

The Dodd-Frank Act’s derivatives reforms contemplate that an individual entity’s systemic riskiness is a product of the interrelations among its various activities and risk-management practices.  As a result, the post-crisis reforms target the activity of derivatives trading as a means to reach those entities that conduct the trading.[15]  As the Commission has acknowledged, “Neither the statutory definition of ‘swap dealer’ nor the Commission’s further definition of that term turns solely on risk to the U.S. financial system.”[16]  And to that end, “[T]he Commission does not believe that the location of counterparty credit risk associated with a dealing swap—which…is easily and often frequently moved across the globe—should be determinative of whether a person’s dealing activity falls within the scope of the Dodd-Frank Act.”[17]  By adopting an overarching risk-based approach to cross-border regulation today, the Commission jeopardizes the integrity and soundness of the markets it regulates.  The Final Rule acknowledges that systemic risk may derive from the activities of entities that do not individually generate the kind of risk that would subject them to systemic risk-based regulation, but then chooses not to address that very risk. When the CFTC focuses its regulatory oversight only on individually systemically significant entities, it unavoidably leaves risky activities unregulated that due to the interconnectedness of global markets individually, and in the aggregate, can and likely will negatively impact U.S. markets.[18]

Moreover, Congress embedded a risk-based approach, appropriate to the Commission’s mandate, within the Dodd-Frank Act’s swap dealer definition by instructing the Commission to exempt from designation as a dealer a person that “engages in a de minimis quantity of swap dealing in connection with transactions with or on behalf of its customers” and providing that an insured depository institution is not to be considered a swap dealer ‘‘to the extent it offers to enter into a swap with a customer in connection with originating a loan with that customer.’’[19]  The swap dealer definition further provides that a person may be designated as a dealer for one or more types, classes or categories of swaps or activities without being designated a dealer for other types, classes, or categories of swaps or activities,[20] further indicating that the type and level of risk a particular person’s activities present are the guiding factor in determining whether they may be required to register with the Commission as an SD and comply with the requirements of Title VII.  The Commission seems to have lost sight of the fact that the activity of swap dealing itself presents the type of risk addressed by Title VII.[21]  The Commission’s ability to establish a threshold amount of such activity that warrants direct oversight via registration does not diminish this underlying trait, which is not binary, but a measure of the scale of risk.  Risk is simply in the DNA of an SD.

As recognized by the Commission, requiring registration and compliance with the requirements of the Dodd-Frank Act reduces risk and enhances operational standards and fair dealing in the swaps markets.[22]  To the extent the Dodd-Frank Act was enacted to reduce systemic risk to the financial system, the CFTC’s role is to individually utilize its expertise in addressing risk to the financial system created by interconnections in the swaps market as a market conduct regulator through supervisory oversight of SDs and MSPs,[23] and to contribute as a voting member in support of the broader systemic risk oversight carried out by the Financial Stability Oversight Council (“FSOC”).[24]

Since 2013, when the Commission announced its first cross-border approach in flexible guidance as a non-binding policy statement,[25] the Commission has understood that the global scale of the swap markets and domestic scale of regulation poses significant challenges for regulators and market participants.[26]  I dissented from the December 2019 proposal for the Final Rule the Commission considers today.[27]  Like the Final Rule, the Proposal suggested that we can resolve all complexities in one fell swoop if we alter our lens, abandon our longstanding and literal interpretation of CEA section 2(i), and limit ourselves to the purely risk-based approach described therein. 

Today’s action ignores that, “It is the essence of regulation that it lays a restraining hand on the self-interest of the regulated and that the advantages from the regulation commonly fall to others.”[28]  The Final Rule is essentially the Proposal with a more clearly articulated intention to rethink the Commission’s mandate under the Dodd-Frank Act to seize the status of primary significant risk regulator—a position the Commission was neither delegated to assume nor provided the resources to occupy—so as to limit the application of Title VII.  Like the Proposal, the Final Rule acknowledges the likelihood that the chosen course will result in increased risks of the kind Title VII directs us to address flowing into the U.S., or even originating in the U.S. via ANE activities, and then states a belief that the chosen approach is either “adequate”[29] or of no moment because our focus on significant participants in the U.S. market should ensure the appropriate persons are subject to Commission oversight via registration, even if, “to the extent that a registered SD or MSP relies on the exceptions in the Final Rule, and is located in a jurisdiction that does not have comparable swap requirements, the Final Rule could lead to weaker risk management practices for such entities.”.[30]  This approach boils down to: ad hoc harmonizing with the Securities and Exchange Commission (“SEC”); de facto delegating to the U.S. prudential regulators; or deferring to a foreign jurisdiction under a banner of comity without ever explaining how the application of the swap dealer de minimis registration threshold is unreasonable.

In various statements throughout the preamble, the Commission subtly—and not so subtly—promotes its emergent “desire to focus its authority on potential significant risks to the U.S. financial system.”[31]  In one glaring instance, the Commission responds to a very clear comment on the weakness of the SRS definition in terms of addressing evasion and avoidance concerns by eviscerating Congress’s very carefully crafted SD definition, stating, “[w]ithout this risk-based approach [SRS], the SD de minimis threshold, which is a strictly activity-based test (i.e., a test based on the aggregate gross notional amount of dealing activity), becomes the de facto risk test of when an entity would be subject to the Commission’s swap requirements as an SD.”[32]  In the past several years, I have noted the Commission’s eagerness to bypass clear Congressional intent in order to address longstanding concerns with Dodd-Frank Act implementation.[33]  Indeed, the Commission has at times made a concerted effort to avoid targeted amendments in favor of sweeping changes to the regulation of swap dealers without regard for the long term consequences of its fickle interpretation of the law and analysis of risk.[34]  I have grave concerns that the Final Rule’s motive in commandeering the role of systemic risk regulator is to provide certainty to entities that they will have sufficient paths in the future to avoid registration with the Commission, and thus fly under the radar of the FSOC and the entire Title VII regime.  As the D.C. District Court noted, the Commission cannot second-guess Congress’ decision that Title VII apply extraterritorially.[35] In layering its new approach over the CEA section 2(i) analysis, the Commission does just that.

My dissent to the Proposal expounded at length on concerns with the Commission’s “new approach,” which seeks to improve upon and clarify the Guidance while reallocating responsibilities in a manner that is ill-conceived given that we are just 10 years past one crisis, and currently navigating a global pandemic.  Accordingly, I will not reiterate my earlier points, but incorporate by reference my prior dissent,[36] which is still on point save for a comment I made on the “unlimited U.S. responsibility prong” to the U.S. person definition, which has been addressed, and I thank staff for addressing my concern.[37]  I will, however, take the opportunity here to focus on how the Commission’s approach to the cross-border application of the SD registration threshold in the Final Rule amounts to a re-write of the Dodd-Frank Act, as exemplified by the “significant risk subsidiary” or “SRS” definition.

The Commission Does Not Have a Blank Check

By codifying a purely and defined risk-based approach to its extraterritorial jurisdiction, exempting from the CFTC’s regulatory oversight all entities but those which individually pose systemic risk to the U.S. financial system, the CFTC abdicates its Congressionally-mandated responsibility under CEA section 2(i) to regulate activities outside of the United States that meet one of the aforementioned jurisdictional nexuses.[38]  The Final Rule today defies Congress’ clear intent in enacting CEA section 2(i), improperly elevates comity over adhesion to the CFTC’s mandate, and increases the riskiness of global swap markets.

Congress demonstrated its ability to discern between purely systemic risk-based and activities-based regulation when it designated authority to the CFTC.  It directed the Commission to develop a metric to analyze which entities pose enough risk to require SD registration, creating an exception to the registration requirement for entities engaged in only a de minimis quantity of swap dealing.[39] It is telling that the CEA does not, under section 2(i), direct the CFTC to develop a similar threshold measurement to evaluate whether foreign entities singularly pose systemic risk to U.S. commerce.  The lack of a comparable exception in CEA section 2(i) indicates that Congress intended to do exactly what the plain language of CEA section 2(i) suggests—require that the CFTC oversee activities outside of the U.S. that pose risk to U.S. commerce (not individual persons or entities). [40]  Furthermore, nothing in the swap dealer definition or CEA section 2(i) expresses that we should defer to prudential regulators, whether U.S. or foreign; prudentially-regulated entities may be required to register as swap dealers with the CFTC.[41]  If the Congress believed that prudential regulation could sufficiently mitigate risk to the U.S. financial system, it would have chosen to delegate this function to the U.S. prudential regulators.  Congress instead chose to enact a registration requirement in Title VII of the Dodd-Frank Act.  Ultimately, the introduction of the concept of an “SRS” and accompanying exemptions for: (1) entities with parents that have less than $50 billion in consolidated assets, and for entities that are already (2) prudentially regulated or (3) subject to comparable foreign regulation, is impermissible under CEA section 2(i).

Whether or not we agree with Congress, the CFTC is not free to rewrite the statute and enact rules that contravene our mandate. Agencies may not act like they have a “blank check” to proffer legislative rules outside of their delegated authority;[42] regulators have to take directives from their governing statute and not second-guess Congress.[43]  Thus, the CFTC is not free to disregard its mandate in the pursuit of other objectives—such as comity, deference, adequacy, workability, or an inexplicable desire to act solely like a prudential regulator—no matter how laudable some of those objectives might be.[44] The Commission today dodges the responsibility with which it was entrusted in the wake of a crisis, impermissibly rewriting the Dodd-Frank Act to pass the buck to prudential regulators and our international counterparts.

The CFTC’s implementation of the Final Rule’s purely risk-based approach to regulating global swaps is neither allowable under Title VII, nor is it wise.  Our current Chairman, in fulfilling his role as the CFTC’s representative on the FSOC, when supporting guidance signifying that the FSOC would adopt an activities-based approach to determining risks to financial stability, stated that an entity-based approach, “inevitably leads to a ‘whack-a-mole’ scenario in which risky activities are transferred out of highly-regulated entities and into less-regulated ones.”[45] Given the conglomeration of exceptions built into the Final Rule’s definitions of “guarantee,” and “SRS,” and its determination regarding “ANE Transactions,” it is hard to see how this transfer of risk to less-regulated entities—which still pose risk in the aggregate to U.S. markets—will not come to pass, inevitably leaving gaps in the CFTC’s ability to oversee the activities it regulates.

With respect to our cooperation with foreign counterparts, I firmly believe that the CFTC should work diligently to coordinate oversight and elevate principles of international comity as we develop our cross-border approach—but not when doing so requires us to abdicate our mandate.  To that end, I generally support the Final Rule’s application of substituted compliance even if I do not fully agree with entity categorizations via the definitions.  I also generally support the CFTC’s deference to foreign regulators when it makes sound comparability determinations.  To the extent the Final Rule grants somewhat indeterminate discretion to the CFTC to depart from an objective evaluation in making such determinations, as noted by several commenters,[46] I will remain vigilant when participating in such Commission action and be mindful of potential for slippage.

I remain concerned that the Final Rule, like the Proposal, makes vague references to “comity” to justify our resistance to regulating overseas activities that pose risk to U.S. markets.  I agree that making substituted compliance available to foreign entities or subsidiaries, via sound comparability determinations, is appropriately deferential to principles of international comity.  Nevertheless, we should only use comity to justify rulemaking when there is ambiguity in the governing statute,[47] or when our requirements unreasonably interfere with those of our international counterparts[48]—neither of which is overtly true regarding our statutory obligation under CEA sections 4s(a) and (c)[49] to register SDs and MSPs based on their swap activities. Registration is a critical first step in determining whether a non-U.S. entity is engaged in activities covered under 2(i), and must not be disregarded for the sake of comity.

It is also pertinent to note here that by prioritizing comity and refusing to appropriately retain jurisdiction, at least to some degree, over transactions that are arranged, negotiated, or executed in the United States by non-U.S. SDs with non-U.S. counterparties (“ANE Transactions”), the Commission’s abdication of Congressionally-mandated responsibility extends beyond CEA section 2(i). There is no need to even address whether these transactions have a “direct and substantial” impact on U.S. commerce, because they occur in the United States and accordingly fall squarely within the regulatory purview of the CFTC.[50]  Ignoring all ANE Transactions invites entities to evade U.S. law, even as they avail themselves of the benefits of U.S. markets by residing in the U.S. and using U.S. personnel, as they can administratively treat transactions as booked in a foreign subsidiary based on the conclusion that any relevant risk has been shipped off.  I am concerned that the CFTC is improperly fixating on comity at the expense of not only its mandate, but also at the expense of developing sound regulation that increases transparency, competition, and market integrity. The Final Rule brushes past concerns raised by a market participant that exempting ANE transactions from reporting requirements gives non-U.S. entities an advantage over U.S. SDs and jeopardizes the intended benefits of the CFTC’s public reporting regime.[51]  I am concerned by the Commission’s response to the comment,[52] and I struggle to understand why any U.S. regulator would implement a rule that defies its statutory mandate, subjects U.S. entities to a competitive disadvantage relative to its foreign counterparts, and reduces U.S. investors’ transparency into the markets.

SRS: This Is the Way

In my dissent to the Proposal, I identified SRS as the most elaborate departure from both the Commission’s interpretation of CEA section 2(i) and from our mandate under the Dodd-Frank Act, in its elimination of a large cross-section of non-U.S. subsidiaries of U.S. parent entities from having to count their swap dealing activities toward the relevant SD or MSP registration threshold calculations.[53]  The SRS replaces the conduit affiliate concept from the Guidance, which, although broader, served to (1) appropriately define the universe of entities whose risks related to swap activities may accrue and have a direct and significant connection with activities in, or effect on, U.S. commerce, and (2) harmonize with the SEC’s cross-border application of the de minimis threshold relevant to security-based swap dealing activity.[54]  

Despite a clear split among Commissioners and commenters, the Commission has determined to move forward with the SRS, which creates broad exceptions that could exclude large amounts of the swap dealing activities by foreign subsidiaries of U.S. entities from counting towards the SD and MSP registration threshold calculations and therefore, ultimately exclude them from the Commission’s oversight and application of the swap dealer regulations.  In support of its determination, the Commission rehashes and repeats the argument that SRS “embodies” the Commission’s purely risk-based approach.[55]  If “this is the way,”[56] then I am afraid our new approach may not account--perhaps at all--for the risk that Congress and the Dodd-Frank Act directed the Commission to oversee.  If Congress had wanted the Commission to focus its cross-border authority solely on systemically significant non-bank entities, it would have been explicit, and refrained from using language in CEA section 2(i) that was so embedded in common law.[57]

In excluding subsidiaries of bank holding companies and intermediate holding companies from the SRS definition, the Commission defers to the “role of prudential regulation in the consolidated oversight of prudential risk,” again relying on “the risk-based approach to determining which foreign subsidiaries present a significant risk to their ultimate U.S. parent and thus to the financial system.”[58]  In presuming that prudential oversight provides “sufficient” comparable oversight to that prescribed by Title VII, the Commission entirely ignores that history weighs against such a presumption[59] and Congress acted accordingly.[60]  Under the Dodd-Frank Act, the CFTC is the “primary financial regulatory agency” for swap dealers.[61]  CEA section 4s(c)[62] provides that any person that is required to be registered as an SD or MSP shall register with the CFTC regardless of whether the person also is a depository institution (i.e., any bank or savings association) or is registered with the SEC as a security-based swap dealer.  Moreover, to the extent SDs or MSPs have a prudential regulator, Title VII recognizes that such SDs/MSPs are to comply with capital and margin requirements established by their respective prudential regulators.[63]  However, it explicitly does not recognize prudential regulation as a substitute for SD/MSP regulatory oversight by the Commission.[64]  

Again, I believe that our cross-border approach must absolutely align with principles of international comity and that our rules and supervisory approach should harmonize and work in tandem with prudential regulation.  However, I do not believe that the SRS definition is reasonable or consistent with the SD definition or CEA section 2(i), due to its deference to the role of prudential regulation in the consolidated oversight of prudential risk to carve out consideration of swap dealing activities of non-U.S. entities (that are not guaranteed by a U.S. person) for purposes of SD registration and Commission oversight.

The Final Rule would suggest that our consideration of the activities of non-U.S. subsidiaries of U.S. entities is an “expansion” of the Commission’s oversight.[65]  I disagree.  The post-2010 crisis reforms require intensive oversight of entities engaged in swaps activities throughout the world.  The Commission must retain in full its oversight and regulatory responsibilities over entities whose activities have a direct and significant connection with activities in, or effect on, U.S. commerce.  To do that effectively, we must be able to apply the SD definition and de minimis threshold to the web of interconnections through which risk travels, not simply rely on bright line balance sheet box checking to wholesale elimination of non-U.S. subsidiaries from our scope of consideration.  As I stated in my prior dissent, without a more concrete understanding as to whether SRS is truly superior to the conduit affiliate[66] concept currently outlined in the Guidance and presumably similar to the SEC’s own approach, it is difficult to get behind a policy that would bring risk into the U.S. of the very type CEA Section 2(i) seeks to address.

Complexity and Burden Should Not Direct the Outcomes

I continue to have reservations regarding the Commission’s determination to discard the Guidance and the use of agency guidance and non-binding policy statements in favor of prescriptive rules.[67]  As I noted with regard to the Proposal, while the Guidance is complex, it is no more complex than this Final Rule.  Complexity is the hallmark of the regulation of cross-border derivatives, and “merely reflects the complexity of swaps markets, swaps transactions, and the corporate structures of the market participants that the CFTC regulates.”[68]  I am especially concerned that the Commission is acting in haste to nail down hard and fast rules while many pieces in the global regulatory puzzle are still in flux.

Commenters refrained from weighing in on the virtues of retaining the Guidance—or agency guidance generally.  The Proposal garnered just 18 relevant comment letters.[69]  It is difficult to determine why, but perhaps market participants have followed the Guidance and utilized their expertise in reviewing the overall statutory scheme and the straightforward language of CEA section 2(i) to come into compliance with Title VII either directly or via substituted compliance and have not found it prohibitive to do so.[70]

Like the Proposal, the Final Rule prides its alteration of various definitions such as “U.S. person” and “guarantee,” the substitution of SRS for conduit affiliates, and the abandonment of ANE Transactions, as burden and/or cost reducing (or, “more workable”).  Unfortunately, I believe the Commission in some instances has not fully evaluated the true weight of the burdens, and in other instances, not fully measured those burdens against the goals of Title VII and the benefits of the overall intent of CEA section 2(i).

A straightforward example is the Commission’s determination to increase the proposed five-year time limits for reliance on representations regarding U.S. person and guarantee status to seven years to appease commenters who asked for perpetual reliance on previously obtained representations.[71]  There is no indication that the Commission considered anything but providing market participants more time, in spite of recognizing that best practice would be to obtain updated representations as soon as practicable. 

A more concerning example is the Commission’s decision to move forward with a narrower definition of “guarantee” than that outlined in the Guidance, despite recognizing that it could lead to entities counting fewer swaps towards their de minimis registration threshold or “qualify additional counterparties for exceptions to certain regulatory requirements as compared to the definition in the Guidance.”[72] The Commission did not address the commenter who also pointed out that the narrower definition would allow significant risk to be transferred back to the U.S. financial system over time noting that, “economic implications are just as important as legal considerations, as confirmed and intended by CEA section 2(i)(1).[73]  Instead, the Final Rule offers the possibility that the SRS definition would capture some non-U.S. persons, returning to the mantra that in this way we focus on those entities that represent “material risk to the U.S. financial system,” through something “workable.”[74]

Conclusion

Before I conclude, I would like to take a moment to thank staff from the Division of Swap Dealer and Intermediary Oversight for their presentations, tireless work on this rulemaking, and frequent engagement with my office over the last few weeks leading up to today’s open meeting.  Like all of the CFTC’s work, today’s discussion would not have been possible without the expertise and commitment of our dedicated staff. 

As the Commission wraps up its scheduled work, before a brief summer respite, particularly on this 10th anniversary week of the Dodd-Frank Act, our work yesterday and today, although some may like to think it, is not the culmination of years of work towards implementing the Dodd-Frank Act.  In fact, the Commission acted promptly in issuing the cross-border 2013 Guidance, only a few years after bill passage and in the throes of dozens of other equally important Title VII rulemakings.

This week’s exercise is a retrenchment of sound derivatives policy that provided the CFTC the tools necessary to monitor swap markets and protect the U.S. financial system and American taxpayers, and most importantly was steadfast to clearly articulated Congressional intent.  There is always room for improvement, tweaking, and evolving—I have said as much, many times since becoming a Commissioner. 

But, unfortunately, during this week that we should be lifting up the merits of financial reform, especially given the role post-crisis reforms played in absorbing massive shocks during the worst of the Covid-19 pandemic just a few months ago, we are turning back the clock to a previous era that proved to be inadequate to meeting our core responsibilities.

 

[1] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010) (“Dodd-Frank Act”).

[2] SIFMA v. CFTC, 67 F.Supp.3d 373 (D.D.C. 2014).

[3] See generally Gonzales v. Raich, 545 U.S. 1 (2005) (relied on by the Commission in the Final Rule at 1.D.2.(i) and in the Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swaps Regulations, 78 FR 45292, 45300 (Jul. 26, 2013) (“Guidance”) to support its interpretation of the Commission’s cross-border authority over swap activities that as a class, or in the aggregate, have a direct and significant connection with activities in, or effect on, U.S. commerce—whether or not an individual swap may satisfy the statutory standard.).

[4] See, e.g., Final Rule at II.C.3.

[5] See Wickard v. Filburn, 317 U.S. 111, 129 (1942).

[6] See SIFMA, 67 F.Supp.3d at 385-86 (citing Inv. Co. Inst. v. CFTC, 891 F.Supp.2d 162, 171, 173 (D.D.C. 2012), aff’d, 720 F.3d 370 (D.C. Cir. 2013)).

[7] See Guidance, 78 FR at 45299.

[8] See Guidance, 78 FR at 45293-5; see also SIFMA, 67 F.Supp.3d at 387-88 (describing the “several poster children for the 2008 financial crisis” that demonstrate the impact that overseas over-the-counter derivatives swaps trading can have on a U.S. parent corporation).

[9] 7 U.S.C. § 2(i).

[10] SIFMA , 67 F.Supp.3d at 423-25, 427; (“Although many provisions in the Dodd-Frank Act explicitly require implementing regulations, Section 2(i) does not.”).

[11] Id. at 423 (citation omitted).

[12] Id. at 424.

[13] Id. at 426.

[14] See Proposal at C.1.; Guidance, 78 FR at 45292, 45300; see also SIFMA, 67 F.Supp.3d at 424-25, 428 n. 31 (finding that Congress addressed issue of determining which entities and activities are covered by Title VII regulations, “For Congress already addressed this ‘important’ issue by defining the scope of the Title VII Rules’ extraterritorial applications in the statute itself.”).

[15] See Jeremy Kress et al., Regulating Entities and Activities: Complimentary Approaches to Nonbank Systemic Risk, 92 S. Cal. L. Rev. 1455, 1459-60, 1462 (Sept. 2019).

[16] Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants, 81 FR 71946, 71952 (Oct. 18, 2016) (“2016 Proposal”); see also Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” 77 FR 30596, 30597-98 (May 23, 2012) (“SD Definition Adopting Release”) (explaining how the Dodd-Frank Act definitions of  “swap dealer” and “security-based swap dealer” focus on whether a person engages in particular types of activities involving swaps or security based swaps); id. at 30757 (In response to questions as to whether the swap dealer definition should appropriately be activities-based or relate to how an entity is classified, Chairman Gensler clarified that, “The final rule is consistent with Congressional intent that we take an activities-based approach.”).

[17] 2016 Proposal 81 Fed. Reg. at 71952.

[18] See Guidance, 78 FR at 45300 (consistent with relevant case law and the purpose of Title VII to protect the U.S. financial system from the build-up of systemic risks, under CEA section 2(i), the Commission must assess the connection of swap activities, viewed as a class or in the aggregate, to activities in commerce of the United States to determine whether application of the CEA swaps provisions is warranted).

[19] See CEA §§ 1a(49)(C)-(D), 7 U.S.C.§§ 1a(49)(C)-(D).

[20] See CEA § 1a(49)(B), 7 U.S.C. § 1a(49)(B).

[21] See Final Rule at II.D.3.(iv) (identifying the SD de minimis threshold as “a strictly activity-based test (i.e., a test based on the aggregate gross notional amount of dealing activity).

[22] See SD Definition Adopting Release, 77 FR at 30599.

[23] See Press Release Number 8033-19, CFTC, CFTC Orders Six Financial Institutions to Pay Total of More Than $6 Million for Reporting Failures (Oct. 1, 2019), https://www.cftc.gov/PressRoom/PressReleases/8033-19 (“The Commission’s swap-dealer risk management rules are designed to monitor and regulate the systemic risk endemic to the swaps marke.t”); see also, Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 84 FR 71740, 71744 (Dec. 30, 2019) (explaining that the activities-based approach to identifying, assessing, and addressing potential  risks and threats to U.S. financial stability reflects two priorities, one of which is “allowing  relevant financial regulatory agencies, which generally possess greater information and expertise with respect to company, product, and market risks, to address potential risks, rather than subjecting companies to new regulatory authorities.”). 

[24] Among other things, the FSOC is authorized to “issue recommendations to the primary financial regulatory agencies to apply new or heightened standards and safeguards.” Dodd-Frank Act § 120, 124 Stat. at 1408-1410.

[25] See Guidance, 78 FR at 45292.

[26] See Hannah L. Buxbaum, Transnational Legal Ordering and Regulatory Conflict: Lessons from the Regulation of Cross Border Derivatives, 1 U.C. Irvine J. Int’l Transnat’l & Comp. L. 91, 92 (2016).

[27] See Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants, 85 FR 952, 1008 (proposed Jan. 8, 2020) (the “Proposal”).

[28] Wickard v. Filburn, 317 U.S. 111.  

[29] See, e.g., Final Rule at II.D.3.(iii)-(iv).

[30] Final Rule at X.C.11.(iv).

[31] See Final Rule at V.C.

[32] See Final Rule at II.D.3.(iv).

[33] See, e.g., De Minimis Exception to the Swap Dealer Definition—Swaps Entered into by Insured Depository Institutions in Connection With Loans to Customers, 84 FR 12450, 1268-1271 (Apr. 1, 2019).

[34] See, e.g., id.; Segregation of Assets Held as Collateral in Uncleared Swap Transactions, 84 FR 12894, 12906 (Apr. 3, 2019); De Minimis Exception to the Swap Dealer Definition, 83 FR 27444 (proposed June 12, 2018).

[35] SIFMA , 67 F.Supp.3d at 432.

[36] See 85 FR at 1009-13.

[37] Id. at 1011.

[38] See 7 U.S.C. § 2(i).

[39] See CEA § 1a(49)(D); 7 U.S.C. § 1a(49)(D).

[40] Silvers v. Sony Pictures Entm't, Inc., 402 F.3d 881, 885 (9th Cir. 2005) (“The doctrine of expressio unius est exclusio alterius ‘as applied to statutory interpretation creates a presumption that when a statute designates certain persons, things, or manners of operation, all omissions should be understood as exclusions.’” (quoting Boudette v. Barnette, 923 F.2d 754, 756-57 (9th Cir. 1991)). 

[41] See also CEA § 4s(c), 7 U.S.C. § 4s(c) (requiring any person that is required to register as a swap dealer or major swap participant to register with the Commission, “regardless of whether the person also is a depository institution or is registered with the Securities and Exchange Commission.”).

[42] Neomi Rao, Address at the Brookings Institution: What’s next for Trump’s regulatory agenda: A conversation with OIRA Administrator Neomi Rao (Jan. 26, 2018), Transcript at 10 (“…agencies should not act as though they have a blank check from Congress to make law.”), https://www.brookings.edu/wp-content/uploads/2018/01/es_20180126_oira_transcript.pdf.

[43] See SIFMA, 67 F.Supp.3d at 432 (finding that the CFTC “could not have second-guessed Congress decision” that Title VII rules apply extraterritorially).

[44] BP W. Coast Prods., LLC v. FERC, 374 F.3d 1263 (D.C. Cir. 2004) (Congressional mandates to agencies to carry out "specific statutory directives define[ing] the relevant functions of [the agency] in a particular area." Such a mandate does not create for the agency "a roving commission" to achieve those or "any other laudable goal."  (quoting Michigan v. EPA, 268 F.3d 1075, 1084 (D.C. Cir. 2001)); see also Farmers Union Cent. Exch., Inc. v. FERC, 734 F.2d 1486, 1500 (D.C.C. 1984) (“Agency decisionmaking, of course, must be more than ‘reasoned’ in light of the record. It must also be true to the Congressional mandate from which it derives authority.”).

[45] Heath P. Tarbert, Chairman, CFTC, Statement on the New Activities-Based Approach to Systemic Risk (Dec. 19, 2019),  https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement120619.

[46] See Proposal at VI.D.1.(ii.).

[47] Michael Greenberger, Too Big to Fail—U.S. Banks’ Regulatory Alchemy: Converting an Obscure Agency Footnote into an “At Will” Nullification of Dodd-Frank’s Regulation of the Multi-Trillion Dollar Financial Swaps Market, 14 J. Bus. & Tech. L. 197, 367 (2019) (“There is no legal precedent extant that defines ‘international comity’ as giving authority to a U.S. administrative agency to weaken unilaterally the otherwise clear Congressional statutory language or intent that the statute must be applied extraterritorially.”)

[48] See Proposal, 85 FR at 957; Final Rule at II.D.3.(iv); Aaron D. Simowitz, The Extraterritoriality Formalisms, 51 Conn. L. Rev. 375, 405-6 and n. 205 (2019) (describing the principle of “prescriptive comity” in the Restatement (Fourth) of Foreign Relations Law and recognizing that “Interference with the sovereign authority of foreign states may be reasonable if such application would serve the legitimate interests of the United States.” (citing Restatement (Fourth) of Foreign Relations Law § 405 cmt. (Am. Law. Inst. 2018)).

[49] CEA §§ 4s(a), (c), 7 U.S.C. §§ 4s(a), (c).

[50] See SIFMA, 67 F. Supp. 3d at 426 (”Section 2(i)'s "technical language initially lays down a general rule placing all [swap] activity" occurring outside of the United States beyond Title VII's reach. But it then expressly brings such swap activities "back within" Title VII's purview). ANE Transactions should not be a part of the initial exemption step required by section 2(i), because they do not occur outside of the United States.

[51] See Proposal at V. B.-C.;  Citadel, Comment Letter on Proposed Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants (Mar. 9, 2020), https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62376 .

[52] See SIFMA, 67 F. Supp. 3d at 429 (An agency “‘need not address every comment, but it must respond in a reasoned manner to those that raise significant problems.’”(citing Covad Commc’ns Co. v. FCC, 450 F.3d 528, 550 (D.C. Cir. 2006) (quoting Reytblatt v. Nuclear Regulatory Comm’n, 105 F.3d 715, 722 (D.C. Cir. 1997))).

[53] 85 FR at 1012; see also Dissenting Statement of Commissioner Dan M. Berkovitz, 85 FR at 1015 (describing the SRS construct as “an empty set.”).

[54] See 17 CFR 240.3a71-3(a)(1).

[55] See Final Rule at II.C. 3.(iii) (in declining to incorporate risk transfer and risk acceptance test into the “significant subsidiary” definition, the Commission finds that such activity-based tests are inconsistent with the Commission’s determination to apply swap requirements to foreign entities using a risk-based test to isolate entities that the Commission considers to pose a significant risk to the financial system based solely on their significance in terms of their balance sheet size relative to the parent entity).

[56]“This is the way” is identified as a Mandalorian mantra and cultural meme associated with keeping members of the group on the same wavelength without any question at all.  See Evan Romano, What ‘This Is the Way’ Explains About the Mandalorians in The Mandalorian, Men’sHealth (Nov. 22, 2019).

[57] See, e.g. Proposal at I.C.1.; Guidance 81 FR at 45298-300; see SIFMA, 67 F.Supp.3d at 427 (“Congress modeled Section 2(i) on other statutes with extraterritorial reach that operate without implementing regulations.” (citations omitted)); see Larry M. Eig, Cong. Research Serv., 97-589, Statutory Interpretation: General Principles and Recent Trends 20 (2014) (Congress is presumed to legislate with knowledge of existing common law.”).

[58] Notably, the Commission determined to use the $50 billion threshold for the ultimate parent entity of an SRS because the FSOC initially used a $50 billion total consolidated assets quantitative test as one threshold to apply to nonbank financial entities for purposes of designated nonbank financial companies as “systemically important financial institutions” (“SIFIs”).  See Proposal, 85 FR at 965 n.134.  The FSOC recently voted to remove the $50 billion threshold because, among other things, it was “not compatible with the prioritization of an activities-based approach” to addressing risks to financial stability.  Id.; see also FSOC Interpretive Guidance, 84 FR at 71742.

[59] See, e.g., Guidance, 78 FR at 45294; Proposal, 85 FR at 1013-15.

[60] Id.

[61] Dodd-Frank Act, Pub. L. 111-203 §2(12)(C)(viii), 124 Stat. 1389.

[62] CEA § 4s(c), 7 U.S.C. § 4s(c).

[63] CEA § 4s(e)(2)(A), 7 U.S.C. § 4s(e)(2)(A)

[64] See Eig, supra note 57 at 16-17 (“where Congress includes particular language in one section of a statute but omits it in another…, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.” (quoting Atlantic Cleaners & Dyers, Inc. v. United States, 286 U.S. 427, 433 (1933))).

[65] Final Rule at II. D. 3. (iv).

[66] See, e.g., 85 FR at 1012 (noting the Proposal’s lack of explaining whether and how the conduit affiliate concept failed to achieve its purpose, is no longer relevant, resulted in loss of liquidity or market fragmentation, proved unworkable, etc.).

[67] Id. at 1010.

[68] SIFMA, 67 F.Supp.3d at 419-20 (“Indeed, the complexity of a regulatory issue is one reason an agency might choose to issue a non-binding policy statement rather than a rigid ‘hard and fast rule.’” (citing SEC v. Chenery Corp., 332 U.S. 194, 202-203 (1947))).

[69] Comments to the Proposal are available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3067.  Of note, the proposal to the Guidance received approximately 290 comment letters.  Guidance, 78 FR at 45295.  The 2016 Proposal received approximately 29 substantive comment letters, available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1752.  

[70] Indeed, the D.C. District Court concluded that the CFTC need not address every facet of the overall regulatory scheme and can rely on regulated market participants to reference other controlling statutes and regulations to address issues left unresolved by a given Title VII rule.  See SIFMA, 67 F. Supp. 3d at 428 n.31.

[71] See Final Rule at II.B.5. and C.3.

[72] See Final Rule at II.C.2. and 3.

[73] Id.

[74] See Final Rule at II.C.3.