CFTC Chairman Publishes White Paper on Cross-Border Swaps Regulation

October 25, 2018

J. Christopher Giancarlo, Chairman of the U.S. Commodity Futures Trading Commission (the “CFTC”), recently published a White Paper entitled “Cross-Border Swaps Regulation Version 2.0.” The White Paper discussed shortfalls of the CFTC’s current approach to applying its swap rules to cross-border activities and proposed an alternative cross-border framework.

The White Paper identified several adverse consequences stemming from the CFTC’s current cross-border approach, including: (i) it is expressed as guidance rather than formalized regulation, (ii) it is both over-expansive and operationally impractical, resulting in greater transaction costs and reduced economic growth, (iii) it encourages a rule-by-rule comparison of CFTC and non-U.S. rules which is often arbitrary and can lead to entities or transactions being subject to a “patchwork” of regulations, and (iv) it fails to show appropriate deference to swaps reforms established by comparable non-U.S. regulators. Chairman Giancarlo believes that these flaws in the framework have resulted in global market participants avoiding doing business with entities regulated by the CFTC and a fragmentation of erstwhile global markets.

In order to remedy these effects, Chairman Giancarlo intends to direct the CFTC staff to set forth new rule proposals that would address, among other things, the registration and regulation of swap dealers and major swap participants as well as the registration of non-U.S. swaps central clearing counterparties (“CCPs”) and swaps trading venues.

Specifically, Chairman Giancarlo recommended the following modifications to the CFTC’s cross-border approach:

  • With regard to non-U.S. CCPs, expand the use of the CFTC’s exemptive authority to account for comparable home-country regulations and permit non-U.S. CCPs to provide clearing services to U.S. customers through non-U.S. clearing members that may not be CFTC-registered;
  • Put an end to the current division of global swaps markets into separate U.S. and non-U.S. person marketplaces and instead create a unified marketplace by exempting non-U.S. trading venues in jurisdictions that have adopted comparable swaps reforms from having to register with the CFTC as swap execution facilities;
  • Require registration of non-U.S. swap dealers whose activity poses a “direct and significant” risk to the U.S. financial system while also taking into account situations where this risk is otherwise addressed and deferring to regimes with comparable swap dealing requirements;
  • Permit non-U.S. persons to rely on their compliance with respect to swap clearing and trade execution requirements in comparable jurisdictions; and
  • Counteract the current fragmentation of U.S. swaps markets by taking a “territorial” approach to what constitutes U.S. swaps trading activity – one that would subject non-incidental swaps trading activity in the United States to U.S. swaps trading rules.

The White Paper does not set forth a specific timeline for the roll-out of new rule proposals, although Chairman Giancarlo clearly suggests that the reform of the cross-border regulatory framework is a matter of significant importance and urgency. The principles articulated in the White Paper are consistent with the message Chairman Giancarlo has been sending for the last several years which, together with the impetus provided by the White Paper, implies that we might expect new rule proposals to be forthcoming sooner, rather than later.

We will be following developments in this area very closely, and will provide further updates as warranted by events. If you have any questions about the White Paper or any aspect of derivatives and trading regulation, please contact any of the partners and counsel listed below or the Seward & Kissel attorney with whom you normally work.