December 21, 2012
I respectfully concur with the Commission’s approval of this Order. The relief provided in the Order is timely and helps provide some level of clarity in the short term to market participants as they transition to the Commission’s new swap regulatory regime. Crucially, it also provides time for the Commission to engage with foreign regulators in order to develop a coordinated, harmonized approach to regulating the global swap markets in the long term.
While I generally support the relief provided, the Order should have done much more to provide clarity and consistency and to ensure a level playing field for market participants. In particular, I would like to note that the definition of “U.S. Person” contained in this Order is the third different definition articulated by the Commission within the past six months: the expansive definition in the Commission’s July proposed guidance,1 the narrower “territorial” definition in an October staff no-action letter,2 and now this modified territorial definition. The industry cannot get too used to this definition either, as there will be, remarkably, a fourth definition next year when the Commission finalizes its cross-border guidance. This is a regrettable lack of consistency for a concept that is so central to foreign swap market participants’ ability to determine their compliance obligations.
This Order expires July 12, 2013. The Commission should use the time between now and then to do two things. First, as mentioned above, it should actively engage with other regulators. I was encouraged by the joint statement released earlier this month by a group of international derivatives regulators (including the Commission),3 which emphasized the importance of coordination and committed the signatories to consult one another with regard to the timing and sequencing of regulation; comparability determinations; clearing determinations; and conflicting, inconsistent and duplicative rules. But these consultations over the next several months cannot merely be an exercise in going through the motions. Rather, they must be substantive, and they should ultimately lead to a final Commission cross-border guidance that addresses the strong concerns raised by fellow regulators about the Commission’s July proposal. For their part, fellow regulators can make this engagement process more effective by providing detailed plans of their existing and upcoming regulations as well as concrete, specific blueprints for potential comparability and substituted compliance determinations.
Second, the Commission should use the next several months to revisit and revise the grossly overbroad conception of extraterritorial reach that it argued for in the July proposed guidance. Most important, the Commission needs to articulate a clear, logical interpretation of the “direct and significant” connection required by the statute as a prerequisite to applying our regulations to entities and activities abroad.4 As I have noted before, the statutory language is a limitation on the Commission’s authority, but the proposed guidance interpreted it as the opposite. If the Commission develops a sufficient rationale for the “direct and significant” standard, it will have gone a long way toward appropriately determining the scope of its extraterritorial reach.
1 Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214 (July 12, 2012).
2 CFTC Division of Swap Dealer and Intermediary Oversight, Re: Time-Limited No-Action Relief: Swaps Only With Certain Persons to be Included in Calculation of Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis Exception and Calculation of Whether a Person is a Major Swap Participant, No-Action Letter No.12-22, Oct. 12, 2012.
3 Joint Press Statement of Leaders on Operating Principles and Areas of Exploration in the Regulation of the Cross-border OTC Derivatives Market, December 4, 2012.
4 7 U.S.C. 2(i).
Last Updated: December 21, 2012