Remarks of Chairman J. Christopher Giancarlo at the Futures Industry Association 12th Annual International Derivatives Expo, London, United Kingdom
“Recalibrating the CFTC’s Cross-Border Regulation: Current Status and Next Steps”
June 5, 2019
Good morning. Thank you for your kind welcome. It is great to be here at the FIA’s International Derivatives Expo in London, at what will be my final speech to the FIA. I expect to be stepping down as Chairman in mid-July and handing the baton to Heath Tarbert.
I am particularly pleased to have this opportunity to speak to you today here at The Brewery. last September, a short walk from here at Guildhall, I gave a speech setting forth [i] A month later, I .[ii] Accordingly, returning
discuss what has been happening at the CFTC on the cross-border front and what you can expect to see happen in the future, especially before I leave the CFTC. I will discuss three rulemakings that are currently being considered by the Commission and then lay out a plan for the remaining rulemakings that I expect to be taken up by the Commission under my successor.
I also want to discuss some of the progress that the CFTC has made with respect to comparability determinations for non-U.S. jurisdictions and discuss an approach to addressing cross-border issues relating to non-U.S. trading platforms.
Before diving into the substance, let’s take a step back and consider the first principles that inform my approach to cross-border regulation.
First, the CFTC is tasked with implementing Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or “Dodd-Frank”). Dodd-Frank was enacted to reduce systemic risk (including risk to the U.S. financial system created by interconnections in the swaps market), increase transparency, and promote market integrity within the financial system. Dodd-Frank is clear in its approach to the extraterritorial application of CFTC rules. The CFTC’s swaps authority “shall not apply” to activities outside the United States unless those activities “have a direct and significant connection with activities in, or effect on, commerce of the United States….”[iii]
Notice that Dodd-Frank addresses the CFTC’s extraterritorial jurisdiction by stating in the negative that the CFTC has no authority outside the United States unless …. Unless what? Unless the activity has a “direct and significant” connection with the United States. Accordingly, determining what is “direct and significant” to the U.S. financial system should be at the heart of the CFTC’s approach to cross-border issues.
Second, a key distinction that informs my cross-border approach is the difference between swaps reforms that are designed to mitigate systemic risk, on the one hand, and swaps reforms that address market and trading practices, on the other. The former includes swaps clearing, margin for uncleared swaps, dealer capital, and recordkeeping and regulatory reporting. These reforms seek to mitigate the type of risk that may have a “direct and significant” connection with the United States. By contrast, swaps reforms that are focused on market and trading practices, such as public trade reporting and price transparency, trading platform design, trade execution methodologies and mechanics, and personnel qualifications, examinations, and regulatory oversight, do not go to systemic risk but to how the markets operate. While certainly important, these reforms generally do not have as great a “direct and significant” connection with the United States as the swaps reforms that are specifically designed to address systemic risk. Such reforms may be legitimately different across jurisdictions depending on local market conditions and characteristics.
Third, the CFTC should act with deference to non-U.S. regulators in jurisdictions that have adopted comparable G20 swaps reforms. In doing so, the CFTC should seek stricter comparability for substituted compliance with requirements intended to address systemic risk and afford more flexible comparability for substituted compliance with requirements intended to address market and trading practices. Mutual commitment to cross-border regulatory deference ideally should mean that market participants can rely on one set of rules – in their totality – without fear that another jurisdiction will seek to selectively impose an additional layer of particular regulatory obligations that reflect differences in policy emphasis, or application of local market-driven policy choices beyond the local market. This approach is essential to ensuring strong and stable derivatives markets that support economic growth both in the United States and around the globe. I will return to this idea in a few minutes when I discuss the progress the CFTC has made in making comparability determinations for non-U.S. jurisdictions.
These first principles are the core of my cross-border approach and inform the CFTC’s new cross-border rulemaking, to which I will now turn.
Current Rulemaking Initiatives
The CFTC staff has prepared three rulemakings that are now being considered by the Commission. The first two deal with issues relating to the regulation and supervision of central counterparties or CCPs. The third deals with swap dealer and major swap participants’ registration and regulation.
DCO Registration with Alternative Compliance Proposal
The first clearing proposal
[vii]a fundamental component of the Commission’s cross-border framework. The use of deference tools, like substituted compliance and exemptions, is intended to promote the benefits of integrated global markets by reducing the degree to which market participants will be subject to duplicative regulations.[viii] Deference also fosters international harmonization by encouraging U.S. and foreign regulators to seek to adopt consistent and comparable regulatory regimes. When properly calibrated, deference promotes open, transparent, and competitive markets without compromising market integrity while mitigating the risk of fragmentation in global cross-border markets.[ix]
and the Monetary Authority of Singapore (“MAS”) announced the mutual recognition of certain derivatives trading venues in the United States and Singapore.[xiii] Specifically, the CFTC issued an order exempting certain derivatives trading facilities regulated by MAS from the requirement to register with the CFTC as swap execution facilities (“SEFs”).[xiv] Previously, the CFTC issued an order exempting certain multilateral trading facilities and organized trading facilities authorized within the EU from the requirement to register with the CFTC as SEFs.[xv] A comparability assessment for Japanese trading venues should also be completed soon.[xvi]
This is all a good start, and I am pleased that many of these comparability determinations came under my Chairmanship. However, I believe the CFTC should continue to make additional comparability determinations wherever appropriate.
Now I want to briefly discuss the remaining implementation plan for the CFTC’s cross-border recalibration. In addition to the releases and comparability determinations discussed above, CFTC staff is also working on a number of additional cross-border rulemakings. These additional rulemakings will address the remaining aspects of the CFTC’s cross-border approach, including application of the clearing, trade execution, and reporting requirements to cross-border swap transactions. The goal is ultimately to replace CFTC guidance and staff advisories and no-action letters with formal rulemakings.
Approach to Non-U.S. Swaps Trading Venues
Non-U.S. swaps trading venues is the last topic I want to touch on today. The CFTC recently proposed amendments to its rules relating to SEFs.[xvii] However, this proposal deliberately did not address the cross-border application of the SEF rules.
Currently market participants look to guidance published by the CFTC staff in 2013 that addressed when multilateral swaps trading platform located outside the United States may have to register with the Commission.[xviii] The staff guidance took the view that a non-U.S. swaps trading venue should register as a SEF (or designated contract market) if it provides U.S. persons or persons located in the United States (including personnel and agents of non-U.S. persons located in the United States) with the ability to trade or execute swaps on or pursuant to the rules of the platform, either directly or indirectly through an intermediary.[xix] At the same time, the staff guidance stated that among the factors that would be relevant in evaluating the SEF registration requirement for non-U.S. swaps trading platforms is whether a significant portion of the market participants that a multilateral swaps trading platform permits to effect transactions are U.S. persons or U.S.-located persons.[xx] This has led to some uncertainty regarding when non-U.S. swaps trading venues may have to register as SEFs. Rightly or wrongly, the staff guidance has generally been interpreted by non-U.S. trading venues to require SEF registration if the trading venue has even one U.S. person that has the ability to trade on the platform.
The CFTC should be committed to trying to make comparability determinations for trading venues in all the major swaps jurisdictions where the vast majority of over 90% of global swaps activity takes place. As I noted above, the CFTC already has exempted trading venues from registration as SEFs in the EU and Singapore, and a comparability assessment for trading venues in Japan is close to completion. In case of Brexit, the CFTC already announced the intention to extend the exemption from registration as SEFs to UK trading venues consistent with our arrangement with the EU.[xxi] This leaves Hong Kong, Australia, Canada, and Switzerland to account for most of the world’s non-U.S. swap activity.
In all remaining jurisdictions where implementation of comparable G20 reforms remains generally incomplete, much less than 10% of global swaps activity takes place. For these jurisdictions, I believe that the CFTC should take a more risk-based approach to the registration of non-U.S. trading venues. Unlike CCPs, trading venues do not pose significant risk to the United States. The CFTC should allow U.S. persons to access the trading venue directly or indirectly through a non-U.S. intermediary, subject to an appropriate materiality threshold. The materiality threshold should be based on a level of trading involving U.S. persons that does not meet the Section 2(i) “direct and significant” standard. The precise standard would be set by the CFTC based on appropriate criteria.
I believe the combination of comparability determinations and a rulemaking for non-major markets that establishes an appropriate materiality threshold should address the concerns that U.S. persons have about accessing foreign markets.
We must have the confidence of our convictions.
I personally hope that we can renew faith in regulatory deference. With the proper balance of sound policy, regulatory oversight, outcomes-based regulatory deference and a little bit of courage, world derivatives markets will continue to evolve in responsible ways and continue to help grow the global economy, creating a future of untethered aspiration where creativity and economic expression is a social good in its own right, and a source of human growth and human advancement.
[i] See Remarks of Chairman J. Christopher Giancarlo to the City Guildhall, London, United Kingdom (Sep. 4, 2018), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo52.
[iii] Section 2(i) of the Commodity Exchange Act also provides that the swap provisions apply to activities outside the United States when they contravene CFTC rules or regulations, as necessary or appropriate to prevent evasion of the swaps provisions of the CEA enacted under Title VII of the Dodd-Frank Act.
[iv] Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 FR 45292 (July 26, 2013), available at: https://www.govinfo.gov/content/pkg/FR-2013-07-26/pdf/2013-17958.pdf.
[v] Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants, 81 FR 21946 (Oct. 18, 2016), available at: https://www.govinfo.gov/content/pkg/FR-2016-10-18/pdf/2016-24905.pdf.
[vi] See CFTC Staff Advisory 13-69, Applicability of Transaction-Level Requirements to Activity in the United States (Nov. 14, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/13-69.pdf; see also CFTC Staff No-Action Letter Nos. 13-71 (Nov. 26, 2013), 14-01 (Jan. 3, 2014), 14-74 (June 4, 2014), 14-140 (Nov. 14, 2014), 15-48 (Aug. 13, 2015), and 17-36 (July 25, 2017). CFTC Staff No-Action Letters are available on the CFTC’s website at: http://www.cftc.gov/LawRegulation/CFTCStaffLetters/No-ActionLetters/index.htm.
[vii] Previously, the Commission provided substituted compliance with respect to foreign futures and options transactions. See, e.g., Foreign Futures and Options Transactions, 67 FR 30785 (May 8, 2002); Foreign Futures and Options Transactions, 71 FR 6759 (Feb. 9, 2006).
[viii] See, e.g., Report of the OTC Derivatives Regulators Group (ODRG) on Cross-Border Implementation Issues (Mar. 2014), available at: https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-03-odrg_odrg_report_to_the_g20_march_2014.pdf.
[ix] See IOSCO Report on Market Fragmentation and Cross-border Regulation (June 4, 2019).
[x] See Comparability Determination for Australia: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 12908 (Apr. 3, 2019), available at: https://www.cftc.gov/sites/default/files/2019-04/2019-06319a.pdf.
[xi] See Amendment to Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 12074 (Apr. 1, 2019), available at: https://www.cftc.gov/sites/default/files/2019-04/2019-06152a.pdf; Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 63376 (Sep. 15, 2016), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2016-22045a.pdf.
[xii] See Comparability Determination for the European Union: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 82 FR 48394 (Oct. 18, 2017), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2017-22616a.pdf. On March 25, 2019, the CFTC adopted interim final rules permitting transfers of qualifying uncleared swaps in the event of a “no-deal” Brexit without triggering CFTC uncleared swap margin requirements. See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 12065 (Apr. 1, 2019), available at: https://www.govinfo.gov/content/pkg/FR-2019-04-01/pdf/2019-06103.pdf.
[xiii] See Joint Statement of the CFTC and the Monetary Authority of Singapore Regarding the Mutual Recognition of Certain Derivatives Trading Venues in the United States and Singapore (Mar. 13, 2019), available at: https://www.cftc.gov/PressRoom/PressReleases/7887-19.
[xiv] See In the Matter of the Exemption of Approved Exchanges and Locally-Incorporated Recognised Market Operators Authorized within Singapore from the Requirement to Register with the Commodity Futures Trading Commission as Swap Execution Facilities (Mar. 13, 2019), available at: https://www.cftc.gov/sites/default/files/2019-03/SingaporeCEASection5hgOrder.pdf.
[xv] See The United States Commodity Futures Trading Commission and the European Commission: A Common Approach on Certain Derivatives Trading Venues (Oct. 13, 2017), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmo_cacdtv101317.pdf; see also In the Matter of the Exemption of Multilateral Trading Facilities and Organised Trading Facilities Authorized Within the European Union from the Requirement to Register with the Commodity Futures Trading Commission as Swap Execution Facilities (Dec. 8, 2017), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@requestsandactions/documents/ifdocs/mtf_otforder12-08-17.pdf
[xvi] In 2013, the CFTC also approved a series of comparability determinations that would permit substituted compliance with non-U.S. regulatory regimes as compared to certain swaps provisions of Title VII of the Dodd-Frank Act and the Commission’s regulations. Working with authorities in Australia, Canada, the EU, Hong Kong, Japan, and Switzerland, the Commission was able to issue comparability determinations for entity-level requirements. In two jurisdictions, the EU and Japan, the Commission also approved substituted compliance for certain transaction-level requirements. See European Union: Certain Entity-Level Requirements, 78 FR 78923 (Dec. 27, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-30980a.pdf; European Union: Certain Transaction-Level Requirements, 78 FR 78878 (Dec. 27, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-30981a.pdf; Japan: Certain Entity-Level Requirements, 78 FR 78910 (Dec. 27, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-30976a.pdf; Japan: Certain Transaction-Level Requirements, 78 FR 78890 (Dec. 27, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-30977a.pdf; Canada: Certain Entity-Level Requirements, 78 FR 78839 (Dec. 27, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-30979a.pdf; Switzerland: Certain Entity-Level Requirements, 78 FR 78899 (Dec. 27, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-30978a.pdf; Hong Kong: Certain Entity-Level Requirements, 78 FR 78852 (Dec. 27, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-30975a.pdf; and Australia: Certain Entity-Level Requirements, 78 FR 78864 (Dec. 27, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-30974a.pdf.
[xvii] See Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946 (Nov. 30, 2018), available at: https://www.cftc.gov/sites/default/files/2018-11/2018-24642a.pdf.
[xviii] Division of Market Oversight Guidance on Application of Certain Commission Regulations to Swap Execution Facilities (Nov. 15, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmosefguidance111513.pdf.
[xix] See id at 2.
[xx] See id at 2, n.8.
[xxi] See Joint Statement by UK and US Authorities on Continuity of Derivatives Trading and Clearing Post-Brexit (Feb. 25, 2019), available at: https://www.cftc.gov/PressRoom/PressReleases/7876-19.
[xxii] See Cross-Border White Paper at 84.