July 12, 2013
Mr. Chairman, I would like to thank the staff and my fellow commissioners and international regulators for all of their hard work to modify the cross-border document and the attendant exemptive relief and no-action letters that enabled us to avert the regulatory train wreck that might have occurred had we not fully engaged with our European counterparts in these last-minute negotiations.
While the agreement is far from perfect and requires extensive no-action relief, I will take away the positive experiences, which validate the ability and desire to harmonize our rules with home country regulators who have the same goals – and in fact many of the same rules as the U.S.
Mr. Chairman, as you well know, I have consistently advocated for close engagement between the full Commission and fellow regulators to harmonize our rules. In my discussions with various international regulatory bodies, it is clear there are varying degrees of reforms that are comparable, some less, but also several that exceed the Commission’s own requirements.
I would have preferred the Commission to take the past year following the release of our Proposed Guidance1 to engage our international colleagues and possibly IOSCO to determine how we could harmonize our rules. After this process was complete, then we could finalize our guidance, taking into account where there are shortcomings. Instead we have chosen to impose statutorily weak guidance, with all its no-action riders and exemptions, with the promise of further negotiations.
Given this process, however, it is my hope that the work lying ahead will be undertaken in a more transparent manner and not done through the abused no-action process that lacks any formal Commission process or rigor.
Further, I hope that this process of substituted compliance will offer the opportunity for other regulatory bodies to engage directly with the full Commission, so that we can better understand how our rules and theirs will work and can minimize the likelihood of regulatory retaliation, inconsistency and duplication. I believe the Commission has worked too hard to develop principles and standards that will encourage greater transparency, open access to clearing and trading and improved market data.
I want to work with other home country regulators to ensure there is not an opportunity for entities to exploit regulatory loopholes. The stark reality is that this Commission is not the global regulatory authority and doesn’t have the resources to support such a mission. Therefore our best and most effective solution is to engage in a fully transparent discussion on substituted compliance and to do so immediately.
When I voted in July 2012 to issue for public comment the Proposed Guidance, I made clear that if I had been asked to vote on the Proposed Guidance as final, my vote would have been no. I then laid out my concerns relating to the Commission’s unsound interpretation of section 2(i) of the CEA,2 which governs the extraterritorial application of the CEA’s swaps provisions. Regrettably, the Final Guidance fails to address these concerns, as I discuss below, and represents a regulatory overreach based on a weak foundation of thin statutory and legal authority.
Just as with the Proposed Guidance, the Final Guidance: misinterprets the language of section 2(i) of the CEA; is inconsistently applied to different activities; blurs the lines between interpretive guidance and rulemaking; and gives insufficient consideration to international law and comity.
Section 2(i) of the CEA as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)3 provides, in part, that the Commission’s swap authority “shall not apply” to foreign activities unless those activities “have a direct and significant connection with activities in, or effect on, commerce of the United States . . . .”4 This provision is clearly a limitation on the Commission’s authority. It follows that the Commission must properly articulate how and when the “direct and significant” standard is met in order to apply Commission rules to swap activities that take place outside of the United States.
The Final Guidance, however, fails to do so. Instead, it treats section 2(i) as a ready tool to expand authority rather than as a limitation. The statutory analysis section of the Final Guidance is insufficient, relying heavily on a comparison with similar statutory language whose wholly different context renders the comparison useless. Because a proper foundation for this standard is never laid, the rest of the document includes sporadic references to “direct and significant” without explaining or justifying the various requirements being placed on market participants.
In an effort to mitigate the broad reach of the guidance and in a moment of humility, the Commission will agree to delay the application of certain elements of the Commission’s swaps regulations largely to accommodate the last-minute finalization of the Final Guidance. The Exemptive Order, in broad terms, provides relief ranging from 75 days to apply the expanded U.S. person definition, to December 21, 2013 for certain entity-level and transactional-level requirements for non-U.S. swap dealers in specific jurisdictions.
In its failure to address this matter earlier, the Commission has included a comment period on the Exemptive Order, seemingly as an acknowledgment of the Administrative Procedure Act, but certainly not in compliance with this binding federal statute. I support the additional time to allow market participants to comply with the Commission’s last-minute guidance, but I cannot support a final order that blatantly ignores the statutorily required comments periods for Commission action, especially when I advocated for a relief package that would have provided for public comment over a month ago.
Mr. Chairman, I have prepared a more thorough dissent that I ask be included in the Federal Register and the record of this meeting.
Let me close by again thanking the staff, the Commission and our fellow international regulators for their cooperation in avoiding a regulatory disaster that should have never been contemplated, let alone narrowly averted. I do look forward to a more transparent and inclusive discussion between the Commission and other home country regulators to harmonize our rules before the next deadline on December 21.
1 Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214 (July 12, 2012).
2 7 U.S.C. 1 et seq.
3 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
4 7 U.S.C. 2(i) (2012).
Last Updated: July 12, 2013