June 6, 2013
The Commission’s exemptive relief from the cross-border application of its Dodd-Frank rules expires on July 12.1 As that date nears, the Commission has only been given one path forward: finalize the cross-border guidance it proposed last July, or else leave the market without any clarity on the extraterritorial application of Commission rules following the expiration of the exemptive relief. There are a number of reasons why the Commission should not be forced into implementing a take-it-or-leave-it solution tied to an arbitrary deadline. Therefore, I am asking my fellow Commissioners to join me in releasing for public comment a proposed extension of the existing exemptive relief until December 31, 2013.
The take-it option is to finalize the guidance. I have significant concerns about the current draft, and I have doubts as to whether the Commission can reach agreement on a final draft before the July 12 deadline. Even if the guidance can be finalized, there is not enough time between now and the deadline for the Commission and its fellow regulators abroad to develop a harmonized cross-border regulatory framework.
The leave-it option, which I find unacceptable, is simply to do nothing and let the relief expire. If the relief expires and the guidance is not finalized, the only relevant authority would be the statutory language articulated by Congress in Dodd-Frank that limits application of the Commission’s swaps rules outside the U.S. to activities with a “direct and significant” connection with, or effect on, the U.S. Firms would then be on their own to determine whether their activities fall within the statute’s “direct and significant” requirement and are thus subject to U.S. regulation. As I’ve said before, this outcome would be the most uncertain, confusing and burdensome outcome for market participants; it may aptly be called the nuclear option. I think we can all agree that this option should be avoided.
There is another option: extend the relief. I have previously expressed my belief that this is the most sensible option, and I believe this even more strongly now with the July 12 deadline fast approaching.
An extension would serve several purposes. It would allow the Commission to develop a more workable final guidance that can be adopted when it is ready, not rushed to completion due to an artificial deadline. It would allow much-needed additional time for the Commission and international regulators to continue their ongoing cooperative efforts to harmonize the global regulatory framework.2 These efforts depend on other jurisdictions finalizing their remaining rules, and the Commission and international regulators agreeing on and implementing a workable regime of substituted compliance and then making determinations pursuant to this regime. All of these processes require more time. Furthermore, an extension would allow time to improve coordination on our cross-border rules with the SEC, particularly on the foundational definition of “U.S. person.”
Since the existing relief was issued pursuant to the Commission’s exemptive authority that requires the Commission to provide notice and comment, the extension of such relief must also be subject to the notice-and-comment requirement. This makes sense, but when such a simple change requires notice-and-comment procedural safeguards, I find it revealing that the Commission somehow thought it was appropriate to lay out its entire cross-border framework in the form of guidance, which does not require such safeguards.
On a practical level, I’ve been informed by our general counsel that even the most expedited notice-and-comment process would require a 14-day comment period.3 Therefore, the Commission must begin the process immediately to ensure that we will be able to issue, by July 12, an extension of the exemptive relief in the event we cannot agree on the final guidance.
To that end, I have drafted a proposed extension to the exemptive order and today I have asked the Chairman to circulate it for Commission vote. I am hopeful that my fellow Commissioners will vote quickly to issue the proposed extension for public comment. Even if the Commission may not unanimously agree on whether extending the relief is the best option, we can all agree that an extension is better than the nuclear option. And by proposing the extension, all we would be doing is preserving it as an option.
The Commission’s cross-border interpretation undoubtedly will have a significant effect on global markets and market participants. Given all that is at stake, and given the looming July 12 deadline, it is imperative for the Commission to have a viable backup plan; failing to do so would be utterly irresponsible.
2 International regulators have consistently urged continued coordination on cross-border harmonization, and as recently as last week issued an explicit request for the Commission to extend its exemptive order: http://www.bloomberg.com/news/2013-05-29/eu-warns-of-uncertainty-if-cftc-won-t-delay-swaps-rule.html.
3 In 2012, a proposed extension to an already existing order granting exemptive relief from certain Dodd-Frank requirements provided for a 14-day comment period: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-11838a.pdf.
Last Updated: June 6, 2013