Dissenting Statement by Commissioner Scott D. O’Malia
Request for Comment on Application of Commission Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in the United States
January 2, 2014
If you thought that the Commission’s approach last year regarding cross-border issues resulted in an unsound rulemaking process, the start of 2014 is no better.
Today’s announcement of the request for comment on a staff Advisory abrogates the Commission’s fundamental legal obligations under the Administrative Procedure Act (“APA”) and provides another example of the Commission’s unsound rule implementation process.
Making matters worse, today’s request for comment is completely outside the scope of the cross-border Guidance and the Exemptive Order as the Commission did not address the issue relating to swaps negotiated between non-U.S. swap dealers (“SDs”) and non-U.S. counterparties acting through agents of the non-U.S. SDs located in the United States. This is simply a strategic move by the Commission to try to duck blame for consistently circumventing the fundamental tenets of the APA and failing to adhere faithfully to the express congressional directive to limit the extraterritorial application of the Dodd-Frank Act to foreign transactions that “have a direct and significant connection with activities in, or effect on, commerce of the United States.”1
Moreover, I question why the Commission has decided to request comment on a narrow issue of the extraterritorial application of Dodd-Frank, while essentially ignoring the dozens of comments already filed as part of the Commission’s cross-border Exemptive Order.2 Simply requesting comment on a staff Advisory does not endorse the validity of the cross-border Guidance or the staff Advisory issued based on the Guidance.
Additionally, I have serious concerns with the evolving jurisdictional application of the Commission’s authority over cross-border trades. It appears based on the staff Advisory, that the Commission is applying a “territorial” jurisdiction test to elements of a trade between non-U.S. entities. To better understand the legal underpinnings of this position, I have included several additional questions to be considered as part of the overall comment file. It is my hope that public comments will provide greater clarity regarding our cross-border authority and identify areas where we must harmonize global rules with our international regulatory partners in the near future. It makes no sense to apply guidance or staff advisories that do not enjoy the full support and authority provided through rulemakings based on the Commodity Exchange Act (“CEA”).
Looking forward into this year, the CFTC needs to do away with the reflexive rule implementation process via staff no-action and advisories that are not voted on by the Commission. It should be the goal of the Commission to develop rules that adhere to the APA and ensure proper regulatory oversight, transparency and promote competition in the derivatives space.
In this regard, I would like to seek additional comment on the following points:
1. Please provide your views on whether Covered Transactions with non-U.S. persons who are not guaranteed or conduit affiliates of U.S. persons meet the direct and significant test under CEA section 2(i).3 Please provide a detailed analysis of any such view and its effect on other aspects of the Commission’s cross-border policy, if any. Would your view change depending on whether a non-U.S. SD is a guaranteed affiliate or a conduit affiliate of a U.S. person?
2. CEA section 2(a)(1)4 provides for the general jurisidiction of the Commission. Please provide your views on whether Covered Transactions with non-U.S. persons who are not guaranteed or conduit affiliates of U.S. persons fall within the Commission’s jurisdiction under CEA section 2(a)(1) or any other provision of the CEA providing for Commission jurisdiction. Please provide a detailed analysis of any such view and its effect on other aspects of the Commission’s cross-border policy, if any. Would your view change depending on the nature of the non-U.S. SD (i.e., whether it is a guaranteed affiliate or a conduit affiliate of a U.S. person)?
3. To the extent that Covered Transactions fall within the Commission’s jurisdiction, should a non-U.S. SD be required to comply with all, or only certain, Transaction-Level Requirements? Please provide a detailed analysis of any such view and its effect on other aspects of the Commission’s cross-border policy, if any. Would your view change depending on the nature of the non-U.S. SD (i.e., whether it is a guaranteed affiliate or a conduit affiliate of a U.S. person)?
4. In the open meeting to consider the cross-border final guidance and cross-border phase-in exemptive order, I asked about the Commission’s enforcement and legal authority under the cross-border guidance. The Commission’s General Counsel replied, “[T]he guidance itself is not binding strictly. We couldn’t go into court and, in a count of the complaint, list a violation of the guidance as an actionable claim.”5 If the Commission adopts the staff Advisory as Commission policy (and not through the rulemaking process), please provide your views on the Commission’s ability to enforce such policy.
1 7 U.S.C. § 2(i).
2 See Statement of Dissent by Commissioner Scott D. O’Malia, Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations and Related Exemptive Order, July 12, 2013, http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
3 7 U.S.C. § 2(i).
4 7 U.S.C. § 2(a)(1).
5 Transcript of Open Meeting to Consider Cross-Border Final Guidance and Cross-Border Phase-In Exemptive Order (July 12, 2013), page 79.
Last Updated: January 3, 2014