I support today’s action by the Commission to amend the order that exempts two types of trading facilities authorized within the European Union (EU)[1] from registration with the CFTC as swap execution facilities (SEFs).  As amended, the order will authorize an additional 16 trading facilities to access US eligible contract participants (ECPs) without complying with the CFTC’s regulations or being subject to the Commission’s oversight.  These trading facilities, located in France, Germany, the Netherlands, Spain, and the UK, include the first EU-authorized trading facilities located outside of the UK to benefit from the order.

Today’s amended order exemplifies the Commission showing deference to a foreign regulatory counterpart.  Congress established a framework for non-US trading facilities to be exempt from SEF registration if the Commission establishes that they are subject to comparable, comprehensive supervision and regulation.[2]  This provision directs the Commission to show deference to its foreign counterparts, when appropriate.  When exercised properly, deference eliminates duplicative regulatory burdens for market participants and conserves the Commission’s resources.  Other provisions of the Commodity Exchange Act also provide for a policy of international deference, including the provision exempting from registration comparably supervised foreign DCOs,[3] and, on a broader level, the provision limiting the Commission’s authority over foreign swaps activity to that having a “direct and significant connection” with US commerce.[4]

A successful policy of deference depends on the CFTC having foreign regulatory counterparts that honor their cross-border commitments.  In 2018, I stated that I would neither support the CFTC granting additional equivalence determinations within the EU nor would I support any relief requested by EU authorities until the EU re-committed to honoring its 2016 agreement with the CFTC on CCP oversight.[5]  That agreement had been in jeopardy since the EU’s issuance of EMIR 2.2 in 2017, which raised the possibility of EU authorities directly supervising US clearinghouses and requiring them to comply with EMIR.  Since then, I have objected to staff no-action relief to a CCP located in the EU[6] and to the Commission’s registration of three foreign boards of trade (FBOTs) located in the EU.[7]  Last week, however, the European Commission adopted three Delegated Acts regarding EU supervision of third-country CCPs, including those located in the US, and these Acts set clearly defined numerical thresholds at which point such CCP would be subject to European regulation and supervision as a “tier 2” CCP. [8] I believe these thresholds reasonably withhold European regulation until the CCP genuinely poses systemic risk to the European market, and, therefore are in the spirit of the 2016 agreement on CCPs between the CFTC and the European Commission.  I recognize that while these Delegated Acts remain subject to review by the European Parliament, their adoption is meaningful and warrants my approval of today’s action for EU trading facilities.  Furthermore, I note that European authorities currently permit US SEFs registered with the CFTC to access European market participants without subjecting those SEFs to EU supervision and regulation.

I would like to thank the staffs of the CFTC and the European Commission for their cooperation in support of today’s amended order.  I hope to be in a position to support additional acts of international deference in the future.

Introduction and Overview

Today, by approving a final rule addressing the cross-border application of the registration thresholds and certain requirements applicable to swap dealers (“SDs”) and major swap participants (“MSPs”) (the “Final Rule”), the Commodity Futures Trading Commission (“CFTC” or “Commission”) overlooks Dodd-Frank Act[1] purposes, Congressional mandates thereunder, an opinion of the D.C. District Court,[2] and multiple comments raising significant concerns.  The Commission instead relies on broad deference that opens a gaping hole[3] in the federal regulatory structure.  I cannot support a decision to jettison a cross-border regime that has not proven unreasonable, inflexible, or ineffective in favor of an approach that fails to address the most critical concerns that the Dodd-Frank Act directed the CFTC to address in favor of “more workable”[4] solutions.  As the Final Rule opts to address the conflicts of economic interest between the regulated and those who are advantaged by it[5] by usurping Congressional (and congressionally delegated) authority to rethink section 2(i) of the Commodity Exchange Act (“CEA” or “Act”) via prescriptive rules, I must respectfully dissent.

Almost ten years ago to the day, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act as a legislative response to the 2008 financial crisis.  Driven by a series of systemic failures, the crisis laid bare that the essentially unregulated and unmonitored over-the-counter derivatives or “swaps” markets were not the bastions of efficiency, stability, and resiliency they were thought to be.[6]  Title VII of the Dodd-Frank Act gave the Commission new and broad authority to regulate the swaps market to address and mitigate risks arising from swap activities.[7] 

Although much of the over-the-counter derivatives market’s contributions to the 2008 financial crisis completed their journey within the continental U.S., the risk originated in foreign jurisdictions.[8]  Accordingly, Congress provided in CEA section 2(i) that the provisions of Title VII, as well as any rules or regulations issued by the CFTC, apply to cross-border activities when certain conditions are met.[9]

The D.C. District Court recognized that “Section 2(i) operates independently, without the need for implementing regulations, and that the CFTC is well within its discretion to proceed by case-by-case adjudications, rather than rulemaking, when applying Section 2(i)’s jurisdictional nexus.”[10]  The D.C. District Court also found that, because the Commission was “not required to issue any rules (let alone binding rules) regarding its intended enforcement policies pursuant to Section 2(i),” the CFTC’s decision to issue the Guidance as a non-binding policy statement benefits market participants.[11]  To the extent the CFTC interpreted the meaning of CEA section 2(i) in its 2013 cross-border Guidance, an interpretation carried forward in the Final Rule today (and in its proposal), such interpretation is permissibly drawn linguistically from the statute and, regardless, cannot substantively change the legislative reach of section 2(i) or the Title VII regime.[12]  In this regard, the interpretation reinforces the direct meaning of CEA section (2)(i)’s grant of authority—without implementing regulations—to enforce the Title VII rules extraterritorially whenever activities “have a direct and significant connection with activities in, or effect on, commerce of the United States.”[13]  Putting aside the anti-evasion prong in CEA section 2(i)(2), it remains that CEA section 2(i) applies the swaps provisions of the CEA to certain activities, viewed in the class or aggregate, outside the United States, that meet either of two jurisdictional nexuses: (1) a direct and significant effect on U.S. commerce; or (2) a direct and significant connection with activities in U.S. commerce, and through such connection, present the type of risks to the U.S. financial system and markets that Title VII directed the Commission to address.[14]

The Dodd-Frank Act’s derivatives reforms contemplate that an individual entity’s systemic riskiness is a product of the interrelations among its various activities and risk-management practices.  As a result, the post-crisis reforms target the activity of derivatives trading as a means to reach those entities that conduct the trading.[15]  As the Commission has acknowledged, “Neither the statutory definition of ‘swap dealer’ nor the Commission’s further definition of that term turns solely on risk to the U.S. financial system.”[16]  And to that end, “[T]he Commission does not believe that the location of counterparty credit risk associated with a dealing swap—which…is easily and often frequently moved across the globe—should be determinative of whether a person’s dealing activity falls within the scope of the Dodd-Frank Act.”[17]  By adopting an overarching risk-based approach to cross-border regulation today, the Commission jeopardizes the integrity and soundness of the markets it regulates.  The Final Rule acknowledges that systemic risk may derive from the activities of entities that do not individually generate the kind of risk that would subject them to systemic risk-based regulation, but then chooses not to address that very risk. When the CFTC focuses its regulatory oversight only on individually systemically significant entities, it unavoidably leaves risky activities unregulated that due to the interconnectedness of global markets individually, and in the aggregate, can and likely will negatively impact U.S. markets.[18]

Moreover, Congress embedded a risk-based approach, appropriate to the Commission’s mandate, within the Dodd-Frank Act’s swap dealer definition by instructing the Commission to exempt from designation as a dealer a person that “engages in a de minimis quantity of swap dealing in connection with transactions with or on behalf of its customers” and providing that an insured depository institution is not to be considered a swap dealer ‘‘to the extent it offers to enter into a swap with a customer in connection with originating a loan with that customer.’’[19]  The swap dealer definition further provides that a person may be designated as a dealer for one or more types, classes or categories of swaps or activities without being designated a dealer for other types, classes, or categories of swaps or activities,[20] further indicating that the type and level of risk a particular person’s activities present are the guiding factor in determining whether they may be required to register with the Commission as an SD and comply with the requirements of Title VII.  The Commission seems to have lost sight of the fact that the activity of swap dealing itself presents the type of risk addressed by Title VII.[21]  The Commission’s ability to establish a threshold amount of such activity that warrants direct oversight via registration does not diminish this underlying trait, which is not binary, but a measure of the scale of risk.  Risk is simply in the DNA of an SD.

As recognized by the Commission, requiring registration and compliance with the requirements of the Dodd-Frank Act reduces risk and enhances operational standards and fair dealing in the swaps markets.[22]  To the extent the Dodd-Frank Act was enacted to reduce systemic risk to the financial system, the CFTC’s role is to individually utilize its expertise in addressing risk to the financial system created by interconnections in the swaps market as a market conduct regulator through supervisory oversight of SDs and MSPs,[23] and to contribute as a voting member in support of the broader systemic risk oversight carried out by the Financial Stability Oversight Council (“FSOC”).[24]

Since 2013, when the Commission announced its first cross-border approach in flexible guidance as a non-binding policy statement,[25] the Commission has understood that the global scale of the swap markets and domestic scale of regulation poses significant challenges for regulators and market participants.[26]  I dissented from the December 2019 proposal for the Final Rule the Commission considers today.[27]  Like the Final Rule, the Proposal suggested that we can resolve all complexities in one fell swoop if we alter our lens, abandon our longstanding and literal interpretation of CEA section 2(i), and limit ourselves to the purely risk-based approach described therein. 

Today’s action ignores that, “It is the essence of regulation that it lays a restraining hand on the self-interest of the regulated and that the advantages from the regulation commonly fall to others.”[28]  The Final Rule is essentially the Proposal with a more clearly articulated intention to rethink the Commission’s mandate under the Dodd-Frank Act to seize the status of primary significant risk regulator—a position the Commission was neither delegated to assume nor provided the resources to occupy—so as to limit the application of Title VII.  Like the Proposal, the Final Rule acknowledges the likelihood that the chosen course will result in increased risks of the kind Title VII directs us to address flowing into the U.S., or even originating in the U.S. via ANE activities, and then states a belief that the chosen approach is either “adequate”[29] or of no moment because our focus on significant participants in the U.S. market should ensure the appropriate persons are subject to Commission oversight via registration, even if, “to the extent that a registered SD or MSP relies on the exceptions in the Final Rule, and is located in a jurisdiction that does not have comparable swap requirements, the Final Rule could lead to weaker risk management practices for such entities.”.[30]  This approach boils down to: ad hoc harmonizing with the Securities and Exchange Commission (“SEC”); de facto delegating to the U.S. prudential regulators; or deferring to a foreign jurisdiction under a banner of comity without ever explaining how the application of the swap dealer de minimis registration threshold is unreasonable.

In various statements throughout the preamble, the Commission subtly—and not so subtly—promotes its emergent “desire to focus its authority on potential significant risks to the U.S. financial system.”[31]  In one glaring instance, the Commission responds to a very clear comment on the weakness of the SRS definition in terms of addressing evasion and avoidance concerns by eviscerating Congress’s very carefully crafted SD definition, stating, “[w]ithout this risk-based approach [SRS], the SD de minimis threshold, which is a strictly activity-based test (i.e., a test based on the aggregate gross notional amount of dealing activity), becomes the de facto risk test of when an entity would be subject to the Commission’s swap requirements as an SD.”[32]  In the past several years, I have noted the Commission’s eagerness to bypass clear Congressional intent in order to address longstanding concerns with Dodd-Frank Act implementation.[33]  Indeed, the Commission has at times made a concerted effort to avoid targeted amendments in favor of sweeping changes to the regulation of swap dealers without regard for the long term consequences of its fickle interpretation of the law and analysis of risk.[34]  I have grave concerns that the Final Rule’s motive in commandeering the role of systemic risk regulator is to provide certainty to entities that they will have sufficient paths in the future to avoid registration with the Commission, and thus fly under the radar of the FSOC and the entire Title VII regime.  As the D.C. District Court noted, the Commission cannot second-guess Congress’ decision that Title VII apply extraterritorially.[35] In layering its new approach over the CEA section 2(i) analysis, the Commission does just that.

My dissent to the Proposal expounded at length on concerns with the Commission’s “new approach,” which seeks to improve upon and clarify the Guidance while reallocating responsibilities in a manner that is ill-conceived given that we are just 10 years past one crisis, and currently navigating a global pandemic.  Accordingly, I will not reiterate my earlier points, but incorporate by reference my prior dissent,[36] which is still on point save for a comment I made on the “unlimited U.S. responsibility prong” to the U.S. person definition, which has been addressed, and I thank staff for addressing my concern.[37]  I will, however, take the opportunity here to focus on how the Commission’s approach to the cross-border application of the SD registration threshold in the Final Rule amounts to a re-write of the Dodd-Frank Act, as exemplified by the “significant risk subsidiary” or “SRS” definition.

The Commission Does Not Have a Blank Check

By codifying a purely and defined risk-based approach to its extraterritorial jurisdiction, exempting from the CFTC’s regulatory oversight all entities but those which individually pose systemic risk to the U.S. financial system, the CFTC abdicates its Congressionally-mandated responsibility under CEA section 2(i) to regulate activities outside of the United States that meet one of the aforementioned jurisdictional nexuses.[38]  The Final Rule today defies Congress’ clear intent in enacting CEA section 2(i), improperly elevates comity over adhesion to the CFTC’s mandate, and increases the riskiness of global swap markets.

Congress demonstrated its ability to discern between purely systemic risk-based and activities-based regulation when it designated authority to the CFTC.  It directed the Commission to develop a metric to analyze which entities pose enough risk to require SD registration, creating an exception to the registration requirement for entities engaged in only a de minimis quantity of swap dealing.[39] It is telling that the CEA does not, under section 2(i), direct the CFTC to develop a similar threshold measurement to evaluate whether foreign entities singularly pose systemic risk to U.S. commerce.  The lack of a comparable exception in CEA section 2(i) indicates that Congress intended to do exactly what the plain language of CEA section 2(i) suggests—require that the CFTC oversee activities outside of the U.S. that pose risk to U.S. commerce (not individual persons or entities). [40]  Furthermore, nothing in the swap dealer definition or CEA section 2(i) expresses that we should defer to prudential regulators, whether U.S. or foreign; prudentially-regulated entities may be required to register as swap dealers with the CFTC.[41]  If the Congress believed that prudential regulation could sufficiently mitigate risk to the U.S. financial system, it would have chosen to delegate this function to the U.S. prudential regulators.  Congress instead chose to enact a registration requirement in Title VII of the Dodd-Frank Act.  Ultimately, the introduction of the concept of an “SRS” and accompanying exemptions for: (1) entities with parents that have less than $50 billion in consolidated assets, and for entities that are already (2) prudentially regulated or (3) subject to comparable foreign regulation, is impermissible under CEA section 2(i).

Whether or not we agree with Congress, the CFTC is not free to rewrite the statute and enact rules that contravene our mandate. Agencies may not act like they have a “blank check” to proffer legislative rules outside of their delegated authority;[42] regulators have to take directives from their governing statute and not second-guess Congress.[43]  Thus, the CFTC is not free to disregard its mandate in the pursuit of other objectives—such as comity, deference, adequacy, workability, or an inexplicable desire to act solely like a prudential regulator—no matter how laudable some of those objectives might be.[44] The Commission today dodges the responsibility with which it was entrusted in the wake of a crisis, impermissibly rewriting the Dodd-Frank Act to pass the buck to prudential regulators and our international counterparts.

The CFTC’s implementation of the Final Rule’s purely risk-based approach to regulating global swaps is neither allowable under Title VII, nor is it wise.  Our current Chairman, in fulfilling his role as the CFTC’s representative on the FSOC, when supporting guidance signifying that the FSOC would adopt an activities-based approach to determining risks to financial stability, stated that an entity-based approach, “inevitably leads to a ‘whack-a-mole’ scenario in which risky activities are transferred out of highly-regulated entities and into less-regulated ones.”[45] Given the conglomeration of exceptions built into the Final Rule’s definitions of “guarantee,” and “SRS,” and its determination regarding “ANE Transactions,” it is hard to see how this transfer of risk to less-regulated entities—which still pose risk in the aggregate to U.S. markets—will not come to pass, inevitably leaving gaps in the CFTC’s ability to oversee the activities it regulates.

With respect to our cooperation with foreign counterparts, I firmly believe that the CFTC should work diligently to coordinate oversight and elevate principles of international comity as we develop our cross-border approach—but not when doing so requires us to abdicate our mandate.  To that end, I generally support the Final Rule’s application of substituted compliance even if I do not fully agree with entity categorizations via the definitions.  I also generally support the CFTC’s deference to foreign regulators when it makes sound comparability determinations.  To the extent the Final Rule grants somewhat indeterminate discretion to the CFTC to depart from an objective evaluation in making such determinations, as noted by several commenters,[46] I will remain vigilant when participating in such Commission action and be mindful of potential for slippage.

I remain concerned that the Final Rule, like the Proposal, makes vague references to “comity” to justify our resistance to regulating overseas activities that pose risk to U.S. markets.  I agree that making substituted compliance available to foreign entities or subsidiaries, via sound comparability determinations, is appropriately deferential to principles of international comity.  Nevertheless, we should only use comity to justify rulemaking when there is ambiguity in the governing statute,[47] or when our requirements unreasonably interfere with those of our international counterparts[48]—neither of which is overtly true regarding our statutory obligation under CEA sections 4s(a) and (c)[49] to register SDs and MSPs based on their swap activities. Registration is a critical first step in determining whether a non-U.S. entity is engaged in activities covered under 2(i), and must not be disregarded for the sake of comity.

It is also pertinent to note here that by prioritizing comity and refusing to appropriately retain jurisdiction, at least to some degree, over transactions that are arranged, negotiated, or executed in the United States by non-U.S. SDs with non-U.S. counterparties (“ANE Transactions”), the Commission’s abdication of Congressionally-mandated responsibility extends beyond CEA section 2(i). There is no need to even address whether these transactions have a “direct and substantial” impact on U.S. commerce, because they occur in the United States and accordingly fall squarely within the regulatory purview of the CFTC.[50]  Ignoring all ANE Transactions invites entities to evade U.S. law, even as they avail themselves of the benefits of U.S. markets by residing in the U.S. and using U.S. personnel, as they can administratively treat transactions as booked in a foreign subsidiary based on the conclusion that any relevant risk has been shipped off.  I am concerned that the CFTC is improperly fixating on comity at the expense of not only its mandate, but also at the expense of developing sound regulation that increases transparency, competition, and market integrity. The Final Rule brushes past concerns raised by a market participant that exempting ANE transactions from reporting requirements gives non-U.S. entities an advantage over U.S. SDs and jeopardizes the intended benefits of the CFTC’s public reporting regime.[51]  I am concerned by the Commission’s response to the comment,[52] and I struggle to understand why any U.S. regulator would implement a rule that defies its statutory mandate, subjects U.S. entities to a competitive disadvantage relative to its foreign counterparts, and reduces U.S. investors’ transparency into the markets.

SRS: This Is the Way

In my dissent to the Proposal, I identified SRS as the most elaborate departure from both the Commission’s interpretation of CEA section 2(i) and from our mandate under the Dodd-Frank Act, in its elimination of a large cross-section of non-U.S. subsidiaries of U.S. parent entities from having to count their swap dealing activities toward the relevant SD or MSP registration threshold calculations.[53]  The SRS replaces the conduit affiliate concept from the Guidance, which, although broader, served to (1) appropriately define the universe of entities whose risks related to swap activities may accrue and have a direct and significant connection with activities in, or effect on, U.S. commerce, and (2) harmonize with the SEC’s cross-border application of the de minimis threshold relevant to security-based swap dealing activity.[54]  

Despite a clear split among Commissioners and commenters, the Commission has determined to move forward with the SRS, which creates broad exceptions that could exclude large amounts of the swap dealing activities by foreign subsidiaries of U.S. entities from counting towards the SD and MSP registration threshold calculations and therefore, ultimately exclude them from the Commission’s oversight and application of the swap dealer regulations.  In support of its determination, the Commission rehashes and repeats the argument that SRS “embodies” the Commission’s purely risk-based approach.[55]  If “this is the way,”[56] then I am afraid our new approach may not account--perhaps at all--for the risk that Congress and the Dodd-Frank Act directed the Commission to oversee.  If Congress had wanted the Commission to focus its cross-border authority solely on systemically significant non-bank entities, it would have been explicit, and refrained from using language in CEA section 2(i) that was so embedded in common law.[57]

In excluding subsidiaries of bank holding companies and intermediate holding companies from the SRS definition, the Commission defers to the “role of prudential regulation in the consolidated oversight of prudential risk,” again relying on “the risk-based approach to determining which foreign subsidiaries present a significant risk to their ultimate U.S. parent and thus to the financial system.”[58]  In presuming that prudential oversight provides “sufficient” comparable oversight to that prescribed by Title VII, the Commission entirely ignores that history weighs against such a presumption[59] and Congress acted accordingly.[60]  Under the Dodd-Frank Act, the CFTC is the “primary financial regulatory agency” for swap dealers.[61]  CEA section 4s(c)[62] provides that any person that is required to be registered as an SD or MSP shall register with the CFTC regardless of whether the person also is a depository institution (i.e., any bank or savings association) or is registered with the SEC as a security-based swap dealer.  Moreover, to the extent SDs or MSPs have a prudential regulator, Title VII recognizes that such SDs/MSPs are to comply with capital and margin requirements established by their respective prudential regulators.[63]  However, it explicitly does not recognize prudential regulation as a substitute for SD/MSP regulatory oversight by the Commission.[64]  

Again, I believe that our cross-border approach must absolutely align with principles of international comity and that our rules and supervisory approach should harmonize and work in tandem with prudential regulation.  However, I do not believe that the SRS definition is reasonable or consistent with the SD definition or CEA section 2(i), due to its deference to the role of prudential regulation in the consolidated oversight of prudential risk to carve out consideration of swap dealing activities of non-U.S. entities (that are not guaranteed by a U.S. person) for purposes of SD registration and Commission oversight.

The Final Rule would suggest that our consideration of the activities of non-U.S. subsidiaries of U.S. entities is an “expansion” of the Commission’s oversight.[65]  I disagree.  The post-2010 crisis reforms require intensive oversight of entities engaged in swaps activities throughout the world.  The Commission must retain in full its oversight and regulatory responsibilities over entities whose activities have a direct and significant connection with activities in, or effect on, U.S. commerce.  To do that effectively, we must be able to apply the SD definition and de minimis threshold to the web of interconnections through which risk travels, not simply rely on bright line balance sheet box checking to wholesale elimination of non-U.S. subsidiaries from our scope of consideration.  As I stated in my prior dissent, without a more concrete understanding as to whether SRS is truly superior to the conduit affiliate[66] concept currently outlined in the Guidance and presumably similar to the SEC’s own approach, it is difficult to get behind a policy that would bring risk into the U.S. of the very type CEA Section 2(i) seeks to address.

Complexity and Burden Should Not Direct the Outcomes

I continue to have reservations regarding the Commission’s determination to discard the Guidance and the use of agency guidance and non-binding policy statements in favor of prescriptive rules.[67]  As I noted with regard to the Proposal, while the Guidance is complex, it is no more complex than this Final Rule.  Complexity is the hallmark of the regulation of cross-border derivatives, and “merely reflects the complexity of swaps markets, swaps transactions, and the corporate structures of the market participants that the CFTC regulates.”[68]  I am especially concerned that the Commission is acting in haste to nail down hard and fast rules while many pieces in the global regulatory puzzle are still in flux.

Commenters refrained from weighing in on the virtues of retaining the Guidance—or agency guidance generally.  The Proposal garnered just 18 relevant comment letters.[69]  It is difficult to determine why, but perhaps market participants have followed the Guidance and utilized their expertise in reviewing the overall statutory scheme and the straightforward language of CEA section 2(i) to come into compliance with Title VII either directly or via substituted compliance and have not found it prohibitive to do so.[70]

Like the Proposal, the Final Rule prides its alteration of various definitions such as “U.S. person” and “guarantee,” the substitution of SRS for conduit affiliates, and the abandonment of ANE Transactions, as burden and/or cost reducing (or, “more workable”).  Unfortunately, I believe the Commission in some instances has not fully evaluated the true weight of the burdens, and in other instances, not fully measured those burdens against the goals of Title VII and the benefits of the overall intent of CEA section 2(i).

A straightforward example is the Commission’s determination to increase the proposed five-year time limits for reliance on representations regarding U.S. person and guarantee status to seven years to appease commenters who asked for perpetual reliance on previously obtained representations.[71]  There is no indication that the Commission considered anything but providing market participants more time, in spite of recognizing that best practice would be to obtain updated representations as soon as practicable. 

A more concerning example is the Commission’s decision to move forward with a narrower definition of “guarantee” than that outlined in the Guidance, despite recognizing that it could lead to entities counting fewer swaps towards their de minimis registration threshold or “qualify additional counterparties for exceptions to certain regulatory requirements as compared to the definition in the Guidance.”[72] The Commission did not address the commenter who also pointed out that the narrower definition would allow significant risk to be transferred back to the U.S. financial system over time noting that, “economic implications are just as important as legal considerations, as confirmed and intended by CEA section 2(i)(1).[73]  Instead, the Final Rule offers the possibility that the SRS definition would capture some non-U.S. persons, returning to the mantra that in this way we focus on those entities that represent “material risk to the U.S. financial system,” through something “workable.”[74]

Conclusion

Before I conclude, I would like to take a moment to thank staff from the Division of Swap Dealer and Intermediary Oversight for their presentations, tireless work on this rulemaking, and frequent engagement with my office over the last few weeks leading up to today’s open meeting.  Like all of the CFTC’s work, today’s discussion would not have been possible without the expertise and commitment of our dedicated staff. 

As the Commission wraps up its scheduled work, before a brief summer respite, particularly on this 10th anniversary week of the Dodd-Frank Act, our work yesterday and today, although some may like to think it, is not the culmination of years of work towards implementing the Dodd-Frank Act.  In fact, the Commission acted promptly in issuing the cross-border 2013 Guidance, only a few years after bill passage and in the throes of dozens of other equally important Title VII rulemakings.

This week’s exercise is a retrenchment of sound derivatives policy that provided the CFTC the tools necessary to monitor swap markets and protect the U.S. financial system and American taxpayers, and most importantly was steadfast to clearly articulated Congressional intent.  There is always room for improvement, tweaking, and evolving—I have said as much, many times since becoming a Commissioner. 

But, unfortunately, during this week that we should be lifting up the merits of financial reform, especially given the role post-crisis reforms played in absorbing massive shocks during the worst of the Covid-19 pandemic just a few months ago, we are turning back the clock to a previous era that proved to be inadequate to meeting our core responsibilities.

 

[1] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010) (“Dodd-Frank Act”).

[2] SIFMA v. CFTC, 67 F.Supp.3d 373 (D.D.C. 2014).

[3] See generally Gonzales v. Raich, 545 U.S. 1 (2005) (relied on by the Commission in the Final Rule at 1.D.2.(i) and in the Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swaps Regulations, 78 FR 45292, 45300 (Jul. 26, 2013) (“Guidance”) to support its interpretation of the Commission’s cross-border authority over swap activities that as a class, or in the aggregate, have a direct and significant connection with activities in, or effect on, U.S. commerce—whether or not an individual swap may satisfy the statutory standard.).

[4] See, e.g., Final Rule at II.C.3.

[5] See Wickard v. Filburn, 317 U.S. 111, 129 (1942).

[6] See SIFMA, 67 F.Supp.3d at 385-86 (citing Inv. Co. Inst. v. CFTC, 891 F.Supp.2d 162, 171, 173 (D.D.C. 2012), aff’d, 720 F.3d 370 (D.C. Cir. 2013)).

[7] See Guidance, 78 FR at 45299.

[8] See Guidance, 78 FR at 45293-5; see also SIFMA, 67 F.Supp.3d at 387-88 (describing the “several poster children for the 2008 financial crisis” that demonstrate the impact that overseas over-the-counter derivatives swaps trading can have on a U.S. parent corporation).

[9] 7 U.S.C. § 2(i).

[10] SIFMA , 67 F.Supp.3d at 423-25, 427; (“Although many provisions in the Dodd-Frank Act explicitly require implementing regulations, Section 2(i) does not.”).

[11] Id. at 423 (citation omitted).

[12] Id. at 424.

[13] Id. at 426.

[14] See Proposal at C.1.; Guidance, 78 FR at 45292, 45300; see also SIFMA, 67 F.Supp.3d at 424-25, 428 n. 31 (finding that Congress addressed issue of determining which entities and activities are covered by Title VII regulations, “For Congress already addressed this ‘important’ issue by defining the scope of the Title VII Rules’ extraterritorial applications in the statute itself.”).

[15] See Jeremy Kress et al., Regulating Entities and Activities: Complimentary Approaches to Nonbank Systemic Risk, 92 S. Cal. L. Rev. 1455, 1459-60, 1462 (Sept. 2019).

[16] Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants, 81 FR 71946, 71952 (Oct. 18, 2016) (“2016 Proposal”); see also Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” 77 FR 30596, 30597-98 (May 23, 2012) (“SD Definition Adopting Release”) (explaining how the Dodd-Frank Act definitions of  “swap dealer” and “security-based swap dealer” focus on whether a person engages in particular types of activities involving swaps or security based swaps); id. at 30757 (In response to questions as to whether the swap dealer definition should appropriately be activities-based or relate to how an entity is classified, Chairman Gensler clarified that, “The final rule is consistent with Congressional intent that we take an activities-based approach.”).

[17] 2016 Proposal 81 Fed. Reg. at 71952.

[18] See Guidance, 78 FR at 45300 (consistent with relevant case law and the purpose of Title VII to protect the U.S. financial system from the build-up of systemic risks, under CEA section 2(i), the Commission must assess the connection of swap activities, viewed as a class or in the aggregate, to activities in commerce of the United States to determine whether application of the CEA swaps provisions is warranted).

[19] See CEA §§ 1a(49)(C)-(D), 7 U.S.C.§§ 1a(49)(C)-(D).

[20] See CEA § 1a(49)(B), 7 U.S.C. § 1a(49)(B).

[21] See Final Rule at II.D.3.(iv) (identifying the SD de minimis threshold as “a strictly activity-based test (i.e., a test based on the aggregate gross notional amount of dealing activity).

[22] See SD Definition Adopting Release, 77 FR at 30599.

[23] See Press Release Number 8033-19, CFTC, CFTC Orders Six Financial Institutions to Pay Total of More Than $6 Million for Reporting Failures (Oct. 1, 2019), https://www.cftc.gov/PressRoom/PressReleases/8033-19 (“The Commission’s swap-dealer risk management rules are designed to monitor and regulate the systemic risk endemic to the swaps marke.t”); see also, Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 84 FR 71740, 71744 (Dec. 30, 2019) (explaining that the activities-based approach to identifying, assessing, and addressing potential  risks and threats to U.S. financial stability reflects two priorities, one of which is “allowing  relevant financial regulatory agencies, which generally possess greater information and expertise with respect to company, product, and market risks, to address potential risks, rather than subjecting companies to new regulatory authorities.”). 

[24] Among other things, the FSOC is authorized to “issue recommendations to the primary financial regulatory agencies to apply new or heightened standards and safeguards.” Dodd-Frank Act § 120, 124 Stat. at 1408-1410.

[25] See Guidance, 78 FR at 45292.

[26] See Hannah L. Buxbaum, Transnational Legal Ordering and Regulatory Conflict: Lessons from the Regulation of Cross Border Derivatives, 1 U.C. Irvine J. Int’l Transnat’l & Comp. L. 91, 92 (2016).

[27] See Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants, 85 FR 952, 1008 (proposed Jan. 8, 2020) (the “Proposal”).

[28] Wickard v. Filburn, 317 U.S. 111.  

[29] See, e.g., Final Rule at II.D.3.(iii)-(iv).

[30] Final Rule at X.C.11.(iv).

[31] See Final Rule at V.C.

[32] See Final Rule at II.D.3.(iv).

[33] See, e.g., De Minimis Exception to the Swap Dealer Definition—Swaps Entered into by Insured Depository Institutions in Connection With Loans to Customers, 84 FR 12450, 1268-1271 (Apr. 1, 2019).

[34] See, e.g., id.; Segregation of Assets Held as Collateral in Uncleared Swap Transactions, 84 FR 12894, 12906 (Apr. 3, 2019); De Minimis Exception to the Swap Dealer Definition, 83 FR 27444 (proposed June 12, 2018).

[35] SIFMA , 67 F.Supp.3d at 432.

[36] See 85 FR at 1009-13.

[37] Id. at 1011.

[38] See 7 U.S.C. § 2(i).

[39] See CEA § 1a(49)(D); 7 U.S.C. § 1a(49)(D).

[40] Silvers v. Sony Pictures Entm't, Inc., 402 F.3d 881, 885 (9th Cir. 2005) (“The doctrine of expressio unius est exclusio alterius ‘as applied to statutory interpretation creates a presumption that when a statute designates certain persons, things, or manners of operation, all omissions should be understood as exclusions.’” (quoting Boudette v. Barnette, 923 F.2d 754, 756-57 (9th Cir. 1991)). 

[41] See also CEA § 4s(c), 7 U.S.C. § 4s(c) (requiring any person that is required to register as a swap dealer or major swap participant to register with the Commission, “regardless of whether the person also is a depository institution or is registered with the Securities and Exchange Commission.”).

[42] Neomi Rao, Address at the Brookings Institution: What’s next for Trump’s regulatory agenda: A conversation with OIRA Administrator Neomi Rao (Jan. 26, 2018), Transcript at 10 (“…agencies should not act as though they have a blank check from Congress to make law.”), https://www.brookings.edu/wp-content/uploads/2018/01/es_20180126_oira_transcript.pdf.

[43] See SIFMA, 67 F.Supp.3d at 432 (finding that the CFTC “could not have second-guessed Congress decision” that Title VII rules apply extraterritorially).

[44] BP W. Coast Prods., LLC v. FERC, 374 F.3d 1263 (D.C. Cir. 2004) (Congressional mandates to agencies to carry out "specific statutory directives define[ing] the relevant functions of [the agency] in a particular area." Such a mandate does not create for the agency "a roving commission" to achieve those or "any other laudable goal."  (quoting Michigan v. EPA, 268 F.3d 1075, 1084 (D.C. Cir. 2001)); see also Farmers Union Cent. Exch., Inc. v. FERC, 734 F.2d 1486, 1500 (D.C.C. 1984) (“Agency decisionmaking, of course, must be more than ‘reasoned’ in light of the record. It must also be true to the Congressional mandate from which it derives authority.”).

[45] Heath P. Tarbert, Chairman, CFTC, Statement on the New Activities-Based Approach to Systemic Risk (Dec. 19, 2019),  https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement120619.

[46] See Proposal at VI.D.1.(ii.).

[47] Michael Greenberger, Too Big to Fail—U.S. Banks’ Regulatory Alchemy: Converting an Obscure Agency Footnote into an “At Will” Nullification of Dodd-Frank’s Regulation of the Multi-Trillion Dollar Financial Swaps Market, 14 J. Bus. & Tech. L. 197, 367 (2019) (“There is no legal precedent extant that defines ‘international comity’ as giving authority to a U.S. administrative agency to weaken unilaterally the otherwise clear Congressional statutory language or intent that the statute must be applied extraterritorially.”)

[48] See Proposal, 85 FR at 957; Final Rule at II.D.3.(iv); Aaron D. Simowitz, The Extraterritoriality Formalisms, 51 Conn. L. Rev. 375, 405-6 and n. 205 (2019) (describing the principle of “prescriptive comity” in the Restatement (Fourth) of Foreign Relations Law and recognizing that “Interference with the sovereign authority of foreign states may be reasonable if such application would serve the legitimate interests of the United States.” (citing Restatement (Fourth) of Foreign Relations Law § 405 cmt. (Am. Law. Inst. 2018)).

[49] CEA §§ 4s(a), (c), 7 U.S.C. §§ 4s(a), (c).

[50] See SIFMA, 67 F. Supp. 3d at 426 (”Section 2(i)'s "technical language initially lays down a general rule placing all [swap] activity" occurring outside of the United States beyond Title VII's reach. But it then expressly brings such swap activities "back within" Title VII's purview). ANE Transactions should not be a part of the initial exemption step required by section 2(i), because they do not occur outside of the United States.

[51] See Proposal at V. B.-C.;  Citadel, Comment Letter on Proposed Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants (Mar. 9, 2020), https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62376 .

[52] See SIFMA, 67 F. Supp. 3d at 429 (An agency “‘need not address every comment, but it must respond in a reasoned manner to those that raise significant problems.’”(citing Covad Commc’ns Co. v. FCC, 450 F.3d 528, 550 (D.C. Cir. 2006) (quoting Reytblatt v. Nuclear Regulatory Comm’n, 105 F.3d 715, 722 (D.C. Cir. 1997))).

[53] 85 FR at 1012; see also Dissenting Statement of Commissioner Dan M. Berkovitz, 85 FR at 1015 (describing the SRS construct as “an empty set.”).

[54] See 17 CFR 240.3a71-3(a)(1).

[55] See Final Rule at II.C. 3.(iii) (in declining to incorporate risk transfer and risk acceptance test into the “significant subsidiary” definition, the Commission finds that such activity-based tests are inconsistent with the Commission’s determination to apply swap requirements to foreign entities using a risk-based test to isolate entities that the Commission considers to pose a significant risk to the financial system based solely on their significance in terms of their balance sheet size relative to the parent entity).

[56]“This is the way” is identified as a Mandalorian mantra and cultural meme associated with keeping members of the group on the same wavelength without any question at all.  See Evan Romano, What ‘This Is the Way’ Explains About the Mandalorians in The Mandalorian, Men’sHealth (Nov. 22, 2019).

[57] See, e.g. Proposal at I.C.1.; Guidance 81 FR at 45298-300; see SIFMA, 67 F.Supp.3d at 427 (“Congress modeled Section 2(i) on other statutes with extraterritorial reach that operate without implementing regulations.” (citations omitted)); see Larry M. Eig, Cong. Research Serv., 97-589, Statutory Interpretation: General Principles and Recent Trends 20 (2014) (Congress is presumed to legislate with knowledge of existing common law.”).

[58] Notably, the Commission determined to use the $50 billion threshold for the ultimate parent entity of an SRS because the FSOC initially used a $50 billion total consolidated assets quantitative test as one threshold to apply to nonbank financial entities for purposes of designated nonbank financial companies as “systemically important financial institutions” (“SIFIs”).  See Proposal, 85 FR at 965 n.134.  The FSOC recently voted to remove the $50 billion threshold because, among other things, it was “not compatible with the prioritization of an activities-based approach” to addressing risks to financial stability.  Id.; see also FSOC Interpretive Guidance, 84 FR at 71742.

[59] See, e.g., Guidance, 78 FR at 45294; Proposal, 85 FR at 1013-15.

[60] Id.

[61] Dodd-Frank Act, Pub. L. 111-203 §2(12)(C)(viii), 124 Stat. 1389.

[62] CEA § 4s(c), 7 U.S.C. § 4s(c).

[63] CEA § 4s(e)(2)(A), 7 U.S.C. § 4s(e)(2)(A)

[64] See Eig, supra note 57 at 16-17 (“where Congress includes particular language in one section of a statute but omits it in another…, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.” (quoting Atlantic Cleaners & Dyers, Inc. v. United States, 286 U.S. 427, 433 (1933))).

[65] Final Rule at II. D. 3. (iv).

[66] See, e.g., 85 FR at 1012 (noting the Proposal’s lack of explaining whether and how the conduit affiliate concept failed to achieve its purpose, is no longer relevant, resulted in loss of liquidity or market fragmentation, proved unworkable, etc.).

[67] Id. at 1010.

[68] SIFMA, 67 F.Supp.3d at 419-20 (“Indeed, the complexity of a regulatory issue is one reason an agency might choose to issue a non-binding policy statement rather than a rigid ‘hard and fast rule.’” (citing SEC v. Chenery Corp., 332 U.S. 194, 202-203 (1947))).

[69] Comments to the Proposal are available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3067.  Of note, the proposal to the Guidance received approximately 290 comment letters.  Guidance, 78 FR at 45295.  The 2016 Proposal received approximately 29 substantive comment letters, available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1752.  

[70] Indeed, the D.C. District Court concluded that the CFTC need not address every facet of the overall regulatory scheme and can rely on regulated market participants to reference other controlling statutes and regulations to address issues left unresolved by a given Title VII rule.  See SIFMA, 67 F. Supp. 3d at 428 n.31.

[71] See Final Rule at II.B.5. and C.3.

[72] See Final Rule at II.C.2. and 3.

[73] Id.

[74] See Final Rule at II.C.3.

Introduction

I dissent from today’s final cross-border swap rulemaking (the “Final Rule”).  As described by the Chairman, this Final Rule will “pare[] back our extraterritorial application of our swap dealer regime.”[1]  Over the past seven years, the current cross-border regime has helped protect the U.S. financial system from risky overseas swap activity.  The Commission should not be paring back these protections for the American financial system, particularly now, during a global pandemic.

The Final Rule will permit U.S. swap dealers to book their swaps with non-U.S. persons in offshore affiliates, thereby avoiding the CFTC’s swap regulations, even when they conduct those swap activities from within the United States and the U.S. parent retains the risks from those swap activities.  The structure of the Final Rule practically invites multinational U.S. banks and hedge funds to book their swaps in offshore affiliates to avoid our swap dealer regulations.  This will permit risks to flow back into the United States with none of the intended regulatory protections.

The Commission defends its retreat by citing principles of international comity and asserting that compliance with the laws of another jurisdiction in lieu of the CFTC’s requirements will be permitted only when the CFTC finds that the laws of the other jurisdiction are “comparable” to those of the CFTC.  The Final Rule, however, establishes a weak and vague standard for determining when the swap regulations of another jurisdiction are comparable.  Further, the Final Rule even permits substituted compliance where the swap activity occurs within the United States—such as for swaps between a U.S. branch of a non-U.S. swap dealer and another non-U.S. person, even if those swaps are negotiated and booked in the United States.  The Commission is not permitted to defer to regulators in other jurisdictions when the swap activity is conducted within the United States, nor should it do so even if such deference were permitted.

As I noted in my dissent on the proposed rule, experience has taught us that while finance may be global, global financial rescues are American.  We should not loosely outsource the protection of the U.S. financial system and American taxpayers to foreign regulators that are unaccountable to the American people.

Less regulation of U.S. persons conducting swap activities outside the U.S.

In the Final Rule, the Commission acknowledges that cross-border swaps activities can have a “direct and significant” connection with activities in, or effect on, U.S. commerce.  The Final Rule, however, removes several key protections in the 2013 Cross-Border Guidance (“Guidance”) [2]  that mitigated the risks arising from such cross-border activities.[3]  The Final Rule narrows the definition of “guarantee” in a legalistic manner, permitting banks to craft financing arrangements for their overseas swap activities that bring risks back into the U.S. parent organization without triggering the application of Dodd-Frank requirements for those activities.  The Final Rule also discards the Guidance’s firewalls that were designed to prevent banks from evading Dodd-Frank requirements by using foreign affiliates as the front office for swaps with non-U.S. persons while bringing the risk from those swaps back to the U.S. home office through back-to-back internal swaps (“affiliate conduits”).

The Final Rule creates a new category of entities—the SRS—supposedly to capture the risks arising from the swap activities of very large foreign affiliates of U.S. firms. But the Commission admits that this new category likely will include “few, if any” entities.[4]  Most likely, therefore, the SRS construct will provide no protections to the financial system from the swap activities of overseas affiliates of U.S. entities that bring risks to their U.S. parents and to the U.S. financial system.  Each of these significant deficiencies is discussed in greater detail below.

Swap activity outside the U.S. guaranteed by a U.S. Person.  The Guidance provided that when a swap of a non-U.S. person is guaranteed by a U.S. person, then the Dodd-Frank requirements regarding swap dealer registration and many of the attendant swap dealer regulations would apply to that non-U.S. person in the same manner as they would apply to a U.S. person.  This is because a swap conducted by a non-U.S. person guaranteed by a U.S. person poses essentially the same risks to the U.S. financial system as a swap conducted by a U.S. person.[5]  The Guidance adopted a functional rather than literal approach to the term “guarantee”:

“The Commission also is affirming that, for purposes of this Guidance, the Commission would interpret the term “guarantee” generally to include not only traditional guarantees of payment or performance of the related swaps, but also other formal arrangements that, in view of all the facts and circumstances, support the non-U.S. person’s ability to pay or perform its swap obligations with respect to its swaps.  The Commission believes that it is necessary to interpret the term “guarantee” to include the different financial arrangements and structures that transfer risk directly back to the United States.  In this regard, it is the substance, rather than the form, of the arrangement that determines whether the arrangement should be considered a guarantee for purposes of the application of section 2(i).”[6]

The Final Rule, however, adopts a narrow, legalistic definition of guarantee:

“Guarantee means an arrangement pursuant to which one party to a swap has rights of recourse against a guarantor, with respect to its counterparty’s obligations under theswap.”[7]  The Commission recognizes that this definition is “narrower” than the definition in the Guidance, and that this narrower definition could result in increased risk to the U.S. financial system.[8]  The Commission further acknowledges that this narrower definition “could lead to certain entities counting fewer swaps towards their de minimis threshold or qualify additional counterparties for exceptions to certain regulatory requirements as compared to the definition in the Guidance.”[9]

The Commission asserts, however, that the narrower definition is “more workable” because it is consistent with the definition of guarantee in the Cross-Border Margin Rule, and therefore will not require an “independent assessment.”[10]  The Commission presents no evidence, however, as to why the current definition, which has now been in place for seven years, is not “workable,” or why multinational financial institutions that trade hundreds of billions, and even trillions, of dollars of swaps on a daily basis are not capable of determining whether their overseas affiliates are guaranteed by a U.S. person.  A global financial institution that cannot readily determine or represent whether or not the risks from its overseas swaps are guaranteed by one of its U.S. entities should not be a global financial institution.

Affiliate conduits.  The Guidance also applied the Dodd-Frank swap dealer registration requirements, and many of the attendant swap dealer regulations, to the swap activities of “affiliate conduits”[11] of U.S. persons in the same manner as it applies to U.S. persons.  Under the Guidance, a key factor in determining whether a non-U.S. person would be considered to be an affiliate conduit of a U.S. person is whether the non-U.S. person regularly enters into swaps with non-U.S. counterparties and then enters into “offsetting swaps or other arrangements with its U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third parties to its U.S. affiliates.”[12]

The affiliate conduit provisions in the Guidance were designed to prevent U.S. entities from booking those swaps in their non-U.S. affiliates to escape the CFTC’s Dodd-Frank requirements that would otherwise apply to the entity’s swap activity in the United States.  The risks and benefits of those swaps booked offshore could then be transferred back to the U.S. with back-to-back internal swaps between the U.S. parent and its non-U.S. affiliate.  Ultimately, risk from the swap would reside on the books of the U.S. entity.  Through this back-to-back process, the U.S. entity could still conduct the swap activity, and bear the risk of the swaps, yet would avoid the application of CFTC requirements that would apply had the swap been booked directly in the U.S. entity.

The Final Rule does not include any comparable provisions to prevent the use of affiliate conduits to avoid CFTC regulation.  This is an invitation to abuse.

Significant risk subsidiary (SRS).  The Final Rule adopts a new construct—the “significant risk subsidiary”—to supposedly encompass overseas affiliates of U.S. entities whose swap activities pose significant risks to the U.S. financial system.  An SRS is defined as any non-U.S. “significant subsidiary” of an ultimate U.S. parent entity where that ultimate parent has more than $50 billion in global consolidated assets.  An entity is a “significant subsidiary” if it has a sufficient size relative to its parent, measured in terms of percentage of either revenue, equity capital, or total assets.[13]  However, the definition then excludes non-U.S. subsidiaries that are either (i) prudentially regulated by the Federal Reserve; or (ii) prudentially regulated by the entity’s home country prudential regulator whose regulations are consistent with the Basel Committee’s capital standards, and subject to comparable margin requirements for uncleared swaps in its home country.  An entity that survives the gantlet of thresholds and exclusions to be considered an SRS would then be subject to the same registration requirements as a U.S. person, and many of the same regulatory requirements that apply to U.S. swap dealers.  That outcome, however, is very unlikely.  The threshold criteria to be a “significant subsidiary” are high, and because entities that meet these high thresholds are typically affiliated with prudentially-regulated banks, it is likely they will be excluded from the SRS definition.  It therefore is improbable that any entities will fall into the SRS category.  The Cost-Benefit Considerations in the notice of proposed rulemaking for the Final Rule concede that “few, if any” entities would fall within its ambit.[14]

Furthermore, the criteria apply to each subsidiary separately.  If an institution has a subsidiary that is approaching the high thresholds set in the Final Rule, it can incorporate another non-U.S. subsidiary and conduct swap dealing activity out of that entity to avoid SRS designation for any of its subsidiaries.

One commenter noted that the qualifications only indirectly address the significance of the subsidiary and suggested the test be modified to assess the extent to which swap risk is accepted by a non-U.S. subsidiary or transferred back to the subsidiary’s U.S. affiliates.[15]  The Commission characterized the suggested test as an activity-based test and rejected the commenter’s proposed fix.  On the other hand, when other commenters noted that subsidiaries that do not engage in any swap dealing activity would potentially be captured by the SRS qualifications—because the qualifications have nothing to do with swaps—the Commission modified the Final Rule with an activity-based end-user test to exempt those entities from the SRS category.

Under the Final Rule, a significant subsidiary that is regulated by U.S. or foreign banking regulators is excluded from the SRS category.  “The Commission is excluding these entities from the definition of SRS, in large part, because the swaps entered into by such entities are already subject to significant regulation, either by the Federal Reserve Board or by the entity’s home country.”[16]

Here the Commission forgets the lessons of the 2008 financial crisis and ignores the mandate of Congress.  Following the financial crisis—and as a result of the lessons learned during the crisis—Congress subjected the swaps markets to both prudential and market regulation.  The Commodity Futures Modernization Act of 2000, which spectacularly failed to prevent the build-up of catastrophic systemic risks within the financial system leading to the 2008 financial crisis, was based on the premise that market regulation is unnecessary to protect against systemic risks for financial entities that are subject to prudential regulation.[17]  Events taught us, however, that prudential regulation alone was insufficient to prevent the build-up of those risks to the financial system. Following the crisis, Congress mandated both prudential regulation and market regulation for banks conducting swap activities.  The safeguards and protections to the financial system afforded under Title VII of the Dodd-Frank Act were to be applied regardless of the extent of prudential regulation.  The prudential regulation in a non-U.S. jurisdiction of an affiliate of a U.S. swap dealer whose swaps risks are transferred back into the U.S. is not an adequate substitute for the protections mandated by Title VII of the Dodd-Frank Act.

The Commission does not dispute that the Final Rule will allow affiliates currently subjected to the Guidance provisions regarding guarantees and affiliate conduits affiliates to operate free of CFTC swap regulations.  The Commission also acknowledges that the activities of these entities may pose risks to the U.S. financial system.[18]  Not only will the Final Rule permit risks to flow into the U.S., but it will provide an incentive for U.S. banks to move their swap activities into these foreign affiliates, where they can conduct the same activities but be free from the CFTC’s regulations.

Less regulation of swap activity in the U.S.

ANE Swaps.  In 2013, the CFTC issued a Staff Advisory addressing the applicability of the “Transaction-Level Requirements” to non-U.S. swap dealers that use persons in the U.S. to facilitate swap transactions with other non-U.S. persons.  The CFTC staff observed that “persons regularly arranging, negotiating, or executing swaps for or on behalf of an SD [swap dealer] are performing core, front-office activities of that SD’s dealing business,” and declared that “the Commission has a strong supervisory interest in swap dealing activities that occur within the United States, regardless of the status of the counterparties.”[19]  The CFTC staff advised that a non-U.S. swap dealer “regularly using personnel or agents located in the U.S. to arrange, negotiate, or execute [“ANE”] a swap with a non-U.S. person generally would be required to comply with the Transaction-Level Requirements.”[20]

The Staff Advisory prompted an outcry from non-U.S. swap dealers, including wholly-owned non-U.S. affiliates of U.S. financial institutions, who objected to the CFTC’s imposition of its clearing, trade execution, reporting, and business conduct standards on their swaps with other non-U.S. persons.  Non-U.S. dealers argued that the risks from these swap activities resided primarily in the home country, and warned that they may remove their swap dealing business from the U.S. if these requirements applied.  Shortly thereafter, the CFTC staff provided no-action relief from the application of the Staff Advisory,[21] and the Commission issued a Request for Comment on whether the Commission should adopt the Staff Advisory, in whole or in part.[22]

The Final Rule discards the ANE concept entirely.  “ANE transactions will not be considered a relevant factor for purposes of applying the Final Rule.”[23]

The ability of non-U.S. persons to use personnel within the U.S., without limitation, to conduct their swap activities with other non-U.S. persons without CFTC regulation or oversight could have a variety of detrimental consequences.  Foremost among these is the possibility, perhaps even likelihood, that U.S. swap dealers will move the booking of their swaps with non-U.S. persons (including non-U.S. affiliates of other U.S. firms) into their own non-U.S. affiliates, while maintaining the U.S. location of the personnel conducting the swap business, in order to avoid the application of the Dodd-Frank requirements to those transactions.  In fact, Citadel noted in its comments on the proposed rule that this may be happening already.  Citadel stated that “market transparency in EUR interest rate swaps for U.S. investors has been greatly reduced based on data showing that, following issuance of the ANE No-Action Relief, interdealer trading activity in EUR interest rate swaps began to be booked almost exclusively to non-U.S. entities, a fact pattern that Citadel believes is ‘consistent with (although not direct proof of) swap dealers strategically choosing the location of the desk executing a particular trade in order to avoid trading in a more transparent and competitive setting.’”[24]

If more than one U.S. swap dealer were to employ this strategy, the result could be that swap activity between two U.S. swap dealers that currently takes place within the U.S. and is fully subject to the CFTC’s swap regulations might then be booked in two non-U.S. affiliates outside the United States.  So long as the U.S. parents do not provide explicit guarantees for the swaps of the subsidiaries,[25] the trading between these subsidiaries would not count toward the dealer registration threshold.  Furthermore, even if one of those non-U.S. entities were a registered swap dealer, the trading would not be subject to any CFTC transaction-level requirements, even though the risk from those transactions is ultimately borne by the U.S. parent through consolidated accounting, and U.S. personnel would be negotiating those transactions.[26]

U.S. banks already conduct a significant amount of inter-bank business through their non-U.S. affiliates.  Data from swap data repositories shows that U.S. bank swap dealers commonly book swaps with each other through their respective non-U.S. subsidiaries.  For a recent one-year period, the data shows that a number of U.S. banks booked more than 10 percent—and in some cases close to 50 percent—of  the reported notional amount of swaps across their entire bank-to-bank swaps books through non-U.S. subsidiaries.  In other words, a number of U.S. banks are already booking material amounts of swaps with each other through their non-U.S. wholly-owned consolidated subsidiaries.

Non-U.S. banks conducting swap activity in the U.S.  The Final Rule reverses the position taken by the Commission in the proposed rule that would have prevented a U.S. branch of a non-U.S. swap entity from obtaining substituted compliance for various transactional requirements for swaps with non-U.S. swap entities that are booked in the U.S. branch.[27]  The cross-border notice of proposed rulemaking upon which the Final Rule is based (“2019 Proposal”) would have permitted substituted compliance only for the foreign-based swaps of a non-U.S. swap entity.  Both under the 2019 Proposal and the Final Rule, a swap conducted by a non-U.S. swap entity through a U.S. branch would not be considered a “foreign-based swap.”

Sensibly, under the 2019 Proposal, substituted compliance would be available only for foreign-based swaps. As the Commission explained in the 2019 Proposal, “[t]he Commission preliminarily believes that the requirements listed in the proposed definitions are appropriate to identify swaps of a non-U.S. banking organization operating through a foreign branch in the United States that should remain subject to Commission requirements. . . .”[28]

Although the Commission repeats nearly verbatim the rationale articulated in the 2019 Proposal for applying CFTC regulations without substituted compliance to transactions booked in the United States, conducted in the United States, and within an organization regulated under the laws of the United States, the Final Rule now excludes swaps booked in a U.S. branch of a non-U.S. swap entity from this general principle, and permits it to obtain substituted compliance for its transactions with non-U.S. persons.[29]

The Commission has no authority to grant substituted compliance for transactions occurring within the United States.  The ability of the Commission to consider international comity in determining whether to apply CFTC regulations or permit substituted compliance with the laws of a foreign regulator only applies with respect to activities outside the United States.  The Final Rule defines a “foreign-based swap” in a manner that does not include swaps booked in the U.S. branch of a non-U.S. swap entity.  The fact that one of the counterparties to a transaction is owned by a non-U.S. entity does not transform activity conducted by that entity within the United States into foreign activity.  Thus, the Final Rule not only retreats from the application of U.S. law to transactions that are arranged, negotiated, and executed in the United States, it even retreats from the application of U.S. law to transactions that are booked in the United States.  This is not in accordance with either Section 2(i) of the Commodity Exchange Act (“CEA”), which limits the application of the swaps provisions of the CEA only with respect to activities outside the United States, or with the principles of international comity, which the Commission recognizes only applies with respect to activity occurring in another jurisdiction.

Weakening the Standards for Substituted Compliance

I agree with the Commission’s interpretation of CEA Section 2(i) that international comity is an important consideration in determining the extent to which the CEA and the CFTC’s swap regulations should apply to cross-border swap activity occurring in another jurisdiction.  I have voted for every substituted compliance determination presented to the Commission during my tenure under the standards adopted in the Guidance.

The standards established in the Final Rule for substituted compliance determinations, however, depart significantly from the current standards.  The Final Rule creates a lesser standard that permits a finding of comparability if the Commission determines that “some or all of the relevant foreign jurisdiction’s standards are comparable . . . or would result in comparable outcomes . . . .”[30] Under the Guidance, however, the Commission must also find that the regulations of the other jurisdiction are as “comprehensive” as the Commission’s regulations.  Furthermore, the Final Rule permits the Commission to consider any factors it “determines are appropriate, which may include”[31] any of four factors listed in the Final Rule.  This “standard for review” is not a standard at all.  It permits the Commission to withdraw the cross-border application of its regulations regardless of the robustness of the other jurisdiction’s regulatory regime, for whatever reasons the Commission chooses.  In the absence of more rigorous, objective criteria, it will be very difficult for the Commission to deny requests from other jurisdictions or market participants for comparability determinations.

Conclusion

The Final Rule is a significant retreat from the robust yet balanced cross-border framework presented in the Guidance.  The current framework has worked well to both protect the U.S. financial system from systemic risks arising from swap activities outside the U.S. and recognize the interests of other nations in regulating conduct within their own borders.  The Final Rule destroys this balance.

I cannot support this abdication of responsibility to protect the U.S. financial markets and the American taxpayer.

I am pleased to support this amendment, which will make two important changes to our Commission’s previously issued 5h(g) Order for the European Union.  First, it will add 16 multilateral trading facilities (“MTFs”) and organized trading facilities (“OTFs”) to the list of European Union entities exempted from SEF registration under Section 5h(g) of the Commodity Exchange Act (“CEA”).  Second, it will make clear that during the remainder of the transition period relating to the withdrawal of the United Kingdom from the European Union, i.e., Brexit, the 5h(g) Order will continue to apply to UK-based MTFs and OTFs.

The addition of these 16 trading facilities located in France, Germany, The Netherlands, Spain, and the United Kingdom is consistent with our prior determination that the European Union’s regulatory frameworks for MTFs and OTFs meet the standard set forth in Section 5h(g) of the CEA.  This reflects the work of our Division of Market Oversight (“DMO”) and our Office of International Affairs in conjunction with their counterparts at the European Commission’s DG FISMA.  DMO confirmed these MTFs and OTFs remain in good standing in their home EU Member States, and that each relevant EU Member State applies the EU regulatory framework and provides reciprocal access for U.S.-based trading platforms.

With respect to Brexit, the EU requirements relating to MTFs and OTFs will continue to apply within the United Kingdom during the transition period.  Therefore, we have clarified that the 5h(g) Order will continue to apply with respect to UK-based trading facilities for the duration of the agreed transition period.  Our actions in this regard will help ensure a smooth transition for the derivatives markets impacted by Brexit.

Today’s amendment to the 5h(g) Order is another important step in our efforts to build a trans-Atlantic regulatory framework that is cooperative and efficient, and reflects mutual respect and deference.  Coupled with high regulatory and supervisory standards, we can work with our European partners to promote the liquidity and resiliency of the trans-Atlantic derivatives markets.  This amendment demonstrates the CFTC’s respect for the dedication and expertise of our European regulatory counterparts.

I have long maintained that regulatory deference must be reciprocated—it must be a two-way street.  Today’s action is based on continued signs that the European Commission and the European Securities Markets Authority are working in good faith to build an appropriate degree of deference into their implementation of the European Market Infrastructure Regulation (“EMIR 2.2”).   In that regard, I would like to note that on July 14, 2020, the European Commission adopted three Delegated Acts under EMIR 2.2.  These acts address EU supervision of third-country central counterparties, and the extent to which they should be subject to heightened supervision by European regulators.  The standards set forth in the Delegated Acts are predictable, proportionate, and designed to provide an appropriate degree of deference to home country supervision.

I look forward to continued engagement with our European counterparts to advance our shared interest in curbing market fragmentation and strengthening reciprocity.  In that context, I am pleased to support today’s amendment to the 5h(g) Order for the European Union.

I am very pleased to support today’s final rule interpreting Congress’ statutory directive that the Commission may only regulate those foreign activities that “have a direct and significant connection with activities in, or effect on commerce, of the United States.”[1]  As I noted when I supported the proposal last December, Congress deliberately placed a clear and strong limitation on the CFTC’s extraterritorial reach, recognizing the need for international comity and deference in a global swaps market.[2]  Today’s rule provides important safeguards to the US financial markets in delineating which cross-border swap activity must be counted towards potential registration with the Commission, and which transactions should be subject to the CFTC’s business conduct requirements for swap dealers (SDs) and major swap participants (MSPs).  At the same time, the final rule appropriately defers to foreign regulatory regimes to avoid duplicative regulation and disadvantaging U.S. institutions acting in foreign markets.

Today’s rule achieves the goals for cross-border regulation that I articulated in a speech before the ISDA Annual Japan Conference in October of last year.[3]  I stated that each jurisdiction’s recognition of, and deference to, the sovereignty of other jurisdictions is crucial in avoiding market fragmentation that poses serious risks to the liquidity and health of the derivatives markets.  This rule properly grants deference to other jurisdictions by limiting the extent to which non-US counterparties must comply with significant aspects of the CFTC’s regulatory framework for SDs and MSPs and by providing market participants with the opportunity to comply with local laws that the Commission has deemed comparable to the CFTC’s regulations (“substituted compliance”).

Substituted Compliance

As I noted with respect to the proposal, substituted compliance is the lynchpin of a global swaps market, and the absence of regulatory deference has been the fracturing sound we hear when the global swaps market fragments.  The final rule provides a framework for substituted compliance with respect to two sets of regulations, “group A” entity-level requirements, such as conflicts of interest policies and a risk management program, and “group B” transaction-level requirements, such as daily trading records, confirmation, and portfolio reconciliation.  While the Commission has issued substituted compliance determinations for entity-level requirements in six jurisdictions and for transaction-level requirements in two jurisdictions, they all contain exceptions for particular provisions of the Commission’s regulations, and one of the transaction-level determinations partially addresses only two of the five regulations in group B.[4] 

Today’s rule provides for a flexible, outcomes-based framework for future comparability determinations that will assess the goals of the Commission’s regulations against the standards of its foreign counterparts’ regimes, instead of directing the Commission to focus on a rigid line-by-line or even regulation-by-regulation comparison.[5]    More specifically, and a primary reason for my support of this final rule, under this new framework, the Commission can compare the goals of its regulations to the outcomes of foreign regulations on an entire group-wide basis, so that the standards of a foreign regime will be considered holistically compared to the goals of all the Commission’s either group A or group B requirements. 

Additionally, this final rule allows the Commission to proactively assess and issue comparability determinations without waiting for a request from a jurisdiction. I recognize that several G-20 jurisdictions have made significant progress in the area of issuing transaction-level requirements, as evidenced by a recent report by the Financial Stability Board (FSB).[6]  I hope that the Commission will soon issue additional substituted compliance determinations in order that foreign firms registered as SDs with the Commission, as well as foreign branches of US SDs, can gain the efficiencies of complying with local laws for many of their transactions with non-US persons.[7]  Ideally, future determinations will provide for comprehensive, holistic substituted compliance in a particular jurisdiction for all transaction-level requirements in the CFTC’s group B.

ANE

Today’s rule properly eliminates the possibility that a non-US SD be required to follow many of the CFTC’s transaction-level requirements for a swap opposite a non-US counterparty if US-based personnel of that SD “arrange, negotiate, or execute” (ANE) the swap.  This action brings to a close almost seven years of uncertainty, beginning with the misguided DSIO Advisory of November 2013.[8]  I note that the staff’s no-action letter issued this week suspends enforcement of ANE with respect to transaction-level requirements not covered by today’s rule, specifically in the areas of real-time reporting of swaps to data repositories and the clearing and trade execution requirements, pending future Commission rulemakings that address these rules in a cross-border context.  I expect the Commission will issue such rules in the near future in order to provide the marketplace with legal certainty in these areas and formally dispense with the ANE construct, just as it has with respect to the requirements addressed today.  I believe strongly that ANE has no place with respect to real-time reporting, the clearing requirement, or the trade execution requirement, just like it has no place with respect to the business conduct regulations.

US Guarantees and SRS

Another important element of today’s rule is that it only requires two, clearly defined classes of non-US entities to count all of their swaps towards the Commission’s SD and MSP registration thresholds, and to generally comply with the Commission’s SD and MSP rules if registered.  The first is an entity whose obligations to a swap are guaranteed by a US person, under a standard consistent with the Commission’s cross-border rule for uncleared swap margin requirements.[9]  The second is an entity deemed a “significant risk subsidiary” (SRS) of a US firm.  It is very important that subsidiaries of US bank holding companies, including intermediate subsidiaries, are carved out from the SRS definition.  Those firms are subject to supervision by the Federal Reserve Board, and, therefore, it does not make sense for the CFTC to deploy its precious resources to regulating those entities. 

Helping US SDs’ Foreign Branches Compete

Today’s rule properly makes substituted compliance available for group B requirements to a foreign branch of a US SD similarly to how substituted compliance is available for many non-US SDs registered with the Commission.  I expect that this will help these branches compete with local institutions in that they will be subject to the same rules.  For example, the Commission has already granted substituted compliance to EU regulations with respect to certain group B regulations.[10]  As a result, both the EU branch of a US firm registered with the Commission as an SD and an EU firm registered as an SD could comply with many of the same EU rules for swaps with a US person or with a non-US person that is either US-guaranteed or an SRS registered as an SD or MSP (“swap entity SRS”).  Moreover, under the “limited foreign branch group B exception,” the foreign branch of a US firm would be excused from complying with any group B rules, subject to a 5% notional cap, for a swap with a non-US person that is neither US guaranteed nor a swap entity SRS.  However, if substituted compliance has been provided in a jurisdiction, then instead of being excused from the group B rules for those swaps, the foreign branch would have to comply with the local rules.  Due to the fact that neither of the transaction-level determinations granted comparability for all of the group B requirements, with respect to those requirements not subject to a substituted compliance determination, the foreign branch may either comply with CFTC regulations or count the notional value of the swap towards its 5% limited group B exception.  Clearly, the rules favor the possibility of substituted compliance, pursuant to which a foreign branch of a US firm would have no limitation in following local rules.  I believe that group-wide comparability determinations, without any exceptions, would simplify this situation and make more consistent the treatment of US dealer’s foreign branches and their local competitors.

In conclusion, I am very pleased to have been a part of the Commission that accomplished this major milestone in a long road of issuing final regulations in the area of cross-border swaps oversight.  I would like to thank the staff of the Division of Swap Dealer and Intermediary Oversight for all of their work in completing this final rule and to Chairman Tarbert for his leadership on this important issue.

President John Adams once warned: “Great is the guilt of unnecessary war.”[1] While he was obviously referring to military conflicts, his admonition applies to conflicts among nations more generally. Financial regulation has not been exempt from international discord. And in recent years, the CFTC’s own cross-border guidance on swaps has caused concerns about a regulatory arms race and the balkanization of global financial markets. Consider the following entreaties by our overseas allies and regulatory counterparts:

“At a time of highly fragile economic growth, we believe that it is critical to avoid taking steps that risk withdrawal from global financial markets into inevitably less efficient regional or national markets.”

– Letter from the Finance Ministers of the United Kingdom, France, Japan, and the European Commission to CFTC Chairman regarding the CFTC’s cross-border guidance (Oct. 17, 2012)

“We believe a failure to address [our] concerns could have unintended consequences, including increasing market fragmentation and, potentially, systemic risk in these markets, as well as unduly increasing the compliance burden on industry and regulators.”

– Letter from the Australian Securities and Investments Commission, the Hong Kong Monetary Authority, the Monetary Authority of Singapore, the Reserve Bank of Australia, and the Securities and Futures Commission of Hong Kong to CFTC Chairman regarding the CFTC’s cross-border guidance (Aug. 27, 2012)

“… [U]sing personnel or agents located in the U.S. would not be a sufficient criterion supporting the duplication of applicable sets of rules to transactions [between non-U.S. persons,] and [we] ask you to consider not directly applying rules on this basis.”

– Letter from Steven Maijoor, Chair, European Securities and Markets Authority to Acting CFTC Chairman regarding the CFTC staff’s “ANE Advisory,” No. 13-69 (Mar. 13, 2014)

I will leave it to others to debate whether the international discord caused by the CFTC’s cross-border guidance[2] and related staff advisory[3] was “necessary” at the time it was introduced. Far more constructive is for us to ask whether it is necessary today. For me, there is but one conclusion: Because nearly all G20 jurisdictions have adopted similar swaps regulations pursuant to the Pittsburgh Accords,[4] it is unnecessary for the CFTC to be the world’s policeman for all swaps.

On this basis, I am pleased to support the Commission’s final rule on the cross-border application of registration thresholds and certain requirements for swap dealers and major swap participants (“swap entities”). This final rule provides critically needed regulatory certainty to the global swaps markets. And I believe it properly balances protection of our national interests with appropriate deference to international counterparts.

Need for Rule-Based Finality

As noted above, the Commission’s 2013 Guidance left much to be desired by both our market participants and our regulatory colleagues overseas. The action was taken outside the standard rulemaking process under the Administrative Procedure Act,[5] so was merely “guidance” that is not technically enforceable. But because market participants as a practical matter followed it nonetheless, it had a sweeping impact on the global swaps markets. Over the intervening years, a patchwork of staff advisories and no-action letters has supplemented the 2013 Guidance. With almost seven years of experience, it is high time for the Commission to bring finality to the issues the 2013 Guidance and its progeny sought to address.

Congressional Mandate

We call this final rule a “cross-border” rule, and in certain respects it is. For example, the rule addresses when non-U.S. persons must count dealing swaps with U.S. persons, including foreign branches of American banks, toward the de minimis threshold in our swap dealer definition. More fundamentally, however, the rule answers a basic question: What swap dealing activity outside the United States should trigger CFTC registration and other requirements?

To answer this question, we must turn to section 2(i) of the Commodity Exchange Act (“CEA”),[6] a provision Congress added in Title VII of the Dodd-Frank Act. Section 2(i) provides that the CEA does not apply to swaps activities outside the United States except in two circumstances: (1) where activities have a “direct and significant connection with activities in, or effect on, commerce of the United States” or (2) where they run afoul of the Commission’s rules or regulations that prevent evasion of Title VII. Section 2(i) evidences Congress’s clear intent for the U.S. swaps regulatory regime to stop at the water’s edge, except where foreign activities either are closely and meaningfully related to U.S. markets or are vehicles to evade our laws and regulations.

I believe the final rule we issue today is a levelheaded approach to the exterritorial application of our swap dealer registration regime and related requirements, and it fully implements the congressional mandate in section 2(i). At the same time, it acknowledges the important role played by the CFTC’s domestic and international counterparts in regulating parts of the global swaps markets. In short, the final rule employs neither a full-throated “intergalactic commerce clause”[7] nor an isolationist mentality. It is thoughtful and balanced, and it will avoid future unnecessary conflicts among regulators.

Guiding Principles for Regulating Foreign Activities

As I have stated before,[8] I am guided by three additional principles in considering the extent to which the CFTC should make use of our extraterritorial powers.

1. Protect the National Interest

An important role of the CFTC is to protect and advance the interests of the United States. In this regard, Congress provided the CFTC with explicit extraterritorial power to safeguard the U.S. financial system where swaps activities are concerned.

It is incumbent upon us to guard against risks created outside the United States flowing back into our country. But our focus cannot be on all risks. Congress made that clear in section 2(i). It would be a markedly poor use of American taxpayers’ dollars to regulate swaps activities in far-flung lands simply to prevent every risk that might have a nexus to the United States. It would also divert the CFTC from channeling our resources where they matter the most: to our own markets and participants. The rule therefore focuses on instances where material risks from abroad are most likely to come back to the United States and where no one but the CFTC is responsible for those risks.

Hence, guarantees of offshore swaps by U.S. parent companies are counted toward our registration requirements because that risk is effectively underwritten and borne in the United States. The same is true with the concept of a “significant risk subsidiary” (“SRS”). As explained in the rule, an SRS is a large non-U.S. subsidiary of a large U.S. company that deals in swaps outside the United States but (1) is not subject to comparable capital and margin requirements in its home country, and (2) is not a subsidiary of a holding company subject to consolidated supervision by an American regulator, namely the Federal Reserve Board. Our final cross-border rule requires an SRS to register as a swap dealer or major swap participant with the CFTC if the SRS exceeds the same registration thresholds as a U.S. firm operating within the United States. The national interest demands it.[9]

2. Follow Kant’s Categorical Imperative

As I said when we proposed this rule, I believe cross-border rulemaking should follow Kant’s “categorical imperative”: we should act according to the maxim that we wish all other rational people to follow, as if it were a universal law.[10]

What I take from that is that we should ourselves establish a regulatory regime that we believe should be the global convention. How would this work? Let me start by explaining how it would not work. If we impose our regulations on non-U.S. persons whenever they have a remote nexus to the United States, then we should be willing for all other jurisdictions to do the same. The end result would be absurdity, with everyone trying to regulate everyone else. And the duplicative and overlapping regulations would inevitably lead to fragmentation in the global swaps markets—itself a potential source of systemic risk.[11] Instead, we should adopt a framework that applies CFTC regulations outside the United States only when it addresses one or more important risks to our markets.

Furthermore, we should afford comity to other regulators who have adopted comparable regulations, just as we expect them to do for us. This is especially important when we evaluate whether foreign subsidiaries of U.S. parent companies could pose a significant risk to our financial system. The categorical imperative leads us to an unavoidable result: We should not impose our regulations on the non-U.S. activities of non-U.S. companies in those jurisdictions that have comparable capital and margin requirements to our own.[12] By the same token, when U.S. subsidiaries of foreign companies operate within our borders, we expect them to follow our laws and regulations and not simply comply with rules from their home country.

Charity, it is often said, begins at home. The categorical imperative further compels us to avoid duplicating the work of other American regulators. If a foreign subsidiary of a U.S. financial institution is subject to consolidated regulation and supervision by the Federal Reserve Board, then we should defer to our domestic counterparts on questions of dealing activity outside the United States. The Federal Reserve Board has extensive regulatory and supervisory tools to ensure a holding company is prudent in its risk-taking at home and abroad.[13] The CFTC instead should focus on regulating dealing activity within the United States or with U.S. persons.

3. Pursue SEC Harmonization Where Appropriate

As I said in connection with our proposal of this rule, I find it surreal that the SEC and the CFTC, two federal agencies that regulate similar products pursuant to the same title of the same statute—with an explicit mandate to “consult and coordinate” with each other—have not agreed until today on how to define “U.S. person.” This failure to coordinate has unnecessarily increased operational and compliance costs for market participants.[14] I am pleased that this final rule uses the same definition of “U.S. person” as the SEC’s cross-border rulemaking.

To be sure, as my colleagues have said on several occasions, we should not harmonize with the SEC merely for the sake of harmonization.[15] We should do so only if it is sensible. In the first instance, we must determine whether Congress has explicitly asked us to do something different or implicitly did so by giving us a different statutory mandate. We must also consider whether differences in our respective products or markets warrant a divergent approach. Just as today’s final rule takes steps toward harmonization, it also diverges where appropriate.

The approach we have taken with respect to “ANE Transactions” is deliberately different than the SEC’s.[16] ANE Transactions are swap (or security-based swap) transactions between two non-U.S. persons that are “arranged, negotiated, or executed” by their personnel or agents located in the United States, but booked to entities outside America. While some or all of the front-end sales activity takes place in the United States, the financial risk of the transactions resides overseas.

Here, key differences in the markets for swaps and security-based swaps are dispositive. The swaps market is far more global than the security-based swaps market. While commodities such as gold and oil are traded throughout the world, equity and debt securities trade predominantly in the jurisdictions where they were issued. For this reason, security-based swaps are inextricably tied to the underlying security, and vice versa. This is particularly the case with single-name credit default swaps, where the arranging, negotiating, or execution is typically done in the United States because the underlying reference entity is a U.S. company. More generally, security-based swaps can affect the price and liquidity of the underlying security, so the SEC has a legitimate interest in regulating transactions in those instruments. By contrast, because commodities are traded globally, there is less need for the CFTC to apply its swaps rules to ANE Transactions.[17]

Moreover, as noted above, Congress directed the CFTC to regulate foreign swaps activities outside the United States that have a “direct and significant” connection to our financial system. Congress did not give a similar mandate to the SEC. As a result, the SEC has not crafted its cross-border rule to extend to an SRS engaged in security-based swap dealing activity offshore that may pose a systemic risk to our financial system. Our rule does with respect to swaps, aiming to protect American taxpayers from another Enron conducting its swaps activities through a major foreign subsidiary without CFTC oversight.

The final rule addresses Transaction-Level Requirements applicable to swap entities (specifically, the Group B and Group C requirements), but does not cover other Transaction-Level Requirements, such as the reporting, clearing, and trade execution requirements. The Commission intends to address these remaining Transaction-Level Requirements (the “Unaddressed TLRs”) in connection with future cross-border rulemakings. Until such time, the Commission will not consider, as a matter of policy, a non-U.S. swap entity’s use of their personnel or agents located in the United States to “arrange, negotiate, or execute” swap transactions with non-U.S. counterparties for purposes of determining whether Unaddressed TLRs apply to such transactions.

In connection with the final rule, DSIO has withdrawn Staff Advisory No. 13-69,[18] and, together with the Division of Clearing and Risk and the Division of Market Oversight, granted certain non-U.S. swap dealers no-action relief with respect to the applicability of the Unaddressed TLRs to their transactions with non-U.S. counterparties that are arranged, negotiated, or executed in the United States. In Staff Advisory 13-69, the CFTC’s staff applied Transaction-Level Requirements to ANE Transactions, without the Commission engaging in notice and comment rulemaking to determine whether such an application is appropriate. Going forward, I fully expect that the Commission will first conduct fact-finding to determine the extent to which ANE Transactions raise policy concerns that are not otherwise addressed by the CEA or our regulations.

Refinements to the Proposed Rule

In response to public comment, and consistent with the guiding principles described above, the final rule includes a number of refinements from the proposal issued last December. I will leave it to our extremely knowledgeable staff to outline all the changes in detail, but I will highlight some of the key refinements here. These principally concern the treatment of SRSs and U.S. branches of foreign swap entities.

1. Significant Risk Subsidiaries

As noted, the SRS concept is not intended to reach subsidiaries of holding companies that are subject to consolidated supervision by the Federal Reserve Board. The final rule recognizes that intermediate holding companies of foreign banking organizations under the Federal Reserve Board’s Regulation YY are subject to such consolidated supervision, and to enhanced capital, liquidity, risk-management, and stress-testing requirements. Accordingly, foreign subsidiaries of intermediate holding companies are excluded from the SRS definition under the final rule.

In addition, the final rule recognizes that certain SRSs may act as “customers” or “end users” in the global swaps markets, engaging in only a de minimis level of swap dealing or no dealing activity at all. Consistent with the principle of focusing on risk to the United States, the “Group B” category of risk-mitigating regulatory requirements will not apply to swaps between a non-U.S. swap entity and an SRS that is simply an end user.[19] This approach will help preserve end users’ access to liquidity in foreign markets.

For similar reasons, the final rule also provides a limited exception from the Group B requirements for a swap entity that is an SRS or a guaranteed entity—to the extent that swap entity’s counterparty is an SRS end user or an Other Non-U.S. Person that is not a swap entity. In addition, the final rule clarifies that a non-U.S. person that is not itself an SRS or a guaranteed entity need not count swaps with an SRS toward its swap dealer de minimis threshold, unless that SRS is a guaranteed entity.

I believe these adjustments to the proposed SRS regime will further serve to channel our regulatory resources, while offering appropriate deference to our domestic and foreign regulatory counterparts.

2. U.S. Branches

The final rule also includes two key changes to the treatment of U.S. branches of foreign swap entities. First, it expands the availability of substituted compliance for the Group B requirements to include swaps between such a U.S. branch, on the one hand, and an SRS or Other Non-U.S. Person, on the other.[20] And second, it creates a new exception from the “Group C” external business conduct standards for swaps between U.S. branches and foreign counterparties (other than guaranteed entities and foreign branches of U.S. swap entities). These changes recognize that U.S. branches, though located on U.S. soil, are part of a non-U.S. legal entity. Accordingly, while such branches should be subject to certain risk-mitigating regulations, they should not be subject to the full panoply of requirements applicable to true U.S. persons.  

Conclusion

In sum, the final rule before us today provides a critical measure of regulatory certainty for the global swaps markets. I believe the rule is also a sensible and principled approach to addressing when foreign transactions should fall within the CFTC’s swap entity registration and related requirements.

I have noted before President Eisenhower’s observation that “The world must learn to work together, or finally it will not work at all.” I sincerely hope our domestic and international counterparts will view today’s action as a positive step toward further cooperation to provide sound regulation to the global swaps markets.

Overview

When we met together in person late last year to consider proposing cross-border rules with respect to registration thresholds and regulatory requirements applicable to swap dealers and major swap participants (the Proposal),[1] I stressed that because we were proposing to replace the Commission’s 2013 cross-border guidance (the Guidance)[2] with binding and enforceable rules, those rules must be clear, sensible, and workable.[3]  In supporting the Proposal at the time, I concluded that the proposed rules met those standards.  And I have not seen anything in the many thoughtful comment letters we received that causes me to doubt that conclusion.

The final rules that are before us today, as we meet remotely several months later, are largely the same as those we proposed.  But based on public input:  1) in several places, we are providing clarifications requested by market participants;[4] 2) in a few places where the proposal deviated from the Guidance, we have been persuaded that the Guidance got it right, and thus are returning to the Guidance approach;[5] and 3) in still other places, we are incorporating suggestions made by commenters.[6]  As a result, the final rules build and improve upon the foundation laid by the Proposal.  They, too, are clear, sensible, and workable, and I am pleased to support them.

I do not plan to summarize here the changes to the Proposal that are encompassed within the final rules.  To those not steeped in the minutiae of de minimis swap dealer registration calculations and entity- and transaction-level requirements under the Guidance,[7] such a summary can become somewhat mind-numbing.  Instead, I would like to place today’s cross-border rulemaking in context, and explain my support from a broader perspective.

Section 2(i) and Codifying the Guidance

We begin, as we must, with the terms of the statute—Section 2(i) of the Commodity Exchange Act (CEA), which was added by the Dodd-Frank Act.[8]  Given the importance of this topic, please indulge my reiterating a few points that I made about the Proposal. 

Section 2(i) limits the international reach of CFTC swap regulations by affirmatively stating that they “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.”[9]  A common-sense reading of this section is that there is a limited extraterritorial reach to the Dodd-Frank swap requirements, and to stretch them beyond the stated statutory criteria impermissibly infringes upon the rule sets of other nations. 

That is, the plainly stated congressional intent is to start with US law not applying beyond our borders, and then continue to the limited conditions where extraterritoriality would be deemed appropriate.  The law does not say that CFTC rules govern derivatives market activities around the world if there is any linkage or tie to the United States and should not be interpreted and abused as such. 

In adopting rules setting out how we will apply Section 2(i) to the registration thresholds and regulatory requirements relevant to the cross-border activities of swap dealers, we are not writing on a blank canvas.  The Guidance has been in place for seven years now, and although it is non-binding,[10] market participants (both those that have registered and those that have had to determine whether they are required to register) have devoted a tremendous amount of human and financial resources to conform to its complicated contours. 

Faced with that reality, although I was not a fan of the Guidance when it was issued,[11] I agree that it is appropriate to codify its basic elements into our rule set rather than start from scratch.  And that is what the final rules before us today will do.  The final rules codify many elements of the Guidance, while updating a few provisions to reflect current realities and incorporating some improvements based on our experience during the intervening years.[12]

Much has been made of statements in the Proposal, which are carried over into today’s release, that the focus of the Commission’s analysis under Section 2(i) is on risk to the U.S. financial system.  But this, too, is essentially a codification of the approach taken in the Guidance.  While I do not often quote then-Chairman Gary Gensler, I note that in his Statement supporting the adoption of the Guidance, he said:

There’s no question to me, at least, that the words of Dodd-Frank addressed this (i.e., risk importation) when they said that a direct and significant connection with activities and/or effect on commerce in the United States covers these risks that may come back to us.

I want to publicly thank Chairman Barney Frank along with Spencer Bachus, Frank Lucas, and Collin Peterson, and their staffs for reaching out to the CFTC and the public to ask how to best address offshore risks that could wash back to our economy in Dodd- Frank.[13]

Implementing our statutory cross-border mandate through a risk-based analysis that focuses on the pertinent issue of risk to the US financial system is a sensible approach, which I endorse.

For those who maintain that the final rules take too narrow a view of the Commission’s extraterritorial reach with respect to swap dealers, I note the truly remarkable fact that today, with the Guidance in effect, approximately half of the over 100 swap dealers currently registered with the CFTC are located outside the United States.[14]  This percentage has stayed relatively constant since the CFTC’s swap dealer registration regime “went live” at the end of 2012.  Registered non-US swap dealers are located across the globe—in North and South America, Europe, Asia, and Australia.

In other words, although it is non-binding, the Commission’s Guidance appears to have brought a substantial portion of global swap dealing activity into the Commission’s swap dealer regulatory regime.  And the record before us is devoid of evidence suggesting that the number of registered non-US swap dealers is seriously over- or under-inclusive.  Given the extent to which the final rules codify the Guidance, a significant change in that number is unlikely.

Because the final rules essentially codify the Guidance, and because I support the final rules for the reasons explained herein, I accept the interpretation of CEA Section 2(i) stated in the Guidance and the final rules in the limited context of registration thresholds and regulatory requirements applicable to swap dealers.  To codify the Guidance while revising the foundation on which it was based would only generate confusion—as opposed to the clarity that I hope this rulemaking will bring to one aspect of our cross-border work.

But the analysis of, in Mr. Gensler’s words, “offshore risks that could wash back to our economy” may well differ in the context of other Dodd-Frank requirements.  As we proceed with other aspects of our cross-border work—in areas such as clearing, trade execution, and reporting—rigorous analysis of the Section 2(i) test for each rule we adopt is necessary to ensure that the law is followed both to the letter and in spirit.

Clear, Sensible, and Workable Rules

Transitioning from the interpretation of Section 2(i) to the rules before us, some have questioned why we are adopting rules in the first place.  While it is true that Section 2(i), unlike other provisions in Dodd-Frank, does not require the Commission to adopt implementing rules, I believe it is good government to do so.  Guidance has its place, of course.  Given the nascent state of post-Pittsburgh derivatives reforms in 2013, reliance on guidance made sense at the time.  But I have spoken before of the benefits of codifying interpretations issued by our staff where appropriate,[15] and those benefits accrue in equal measure to the codification of Commission guidance.  Replacing the prior Guidance with rules that reflect current realities and are based on experience developed during the past seven years provides certainty to the marketplace and a shared understanding of the “rules of the road.”   

Some may argue that in those few places where the rules of the road that we are adopting today depart from the Guidance, the Commission has retreated with respect to the extraterritorial application of its swap regulatory regime.  As I shall discuss, however, such criticisms fail to take account of other, equally important, considerations relevant to the exercise of our rulemaking authority:  1) the aforementioned need for clear, sensible, and workable rules; and 2) appropriate deference to comparable regimes of our international regulatory colleagues.

Definition of a “Guarantee”

For example, the release accompanying the final rules acknowledges that the definition of a “guarantee” that we are adopting today is narrower than that in the Guidance.  The final rules define a “guarantee” as an arrangement in which one party to a swap has rights of recourse against a guarantor with respect to its counterparty’s obligations under the swap, with “rights of recourse” meaning a legally enforceable right to collect payments from the guarantor.  By contrast, the Guidance interpreted a “guarantee” to include not only the foregoing, “but also other formal arrangements that, in view of all the facts and circumstances, support the non-U.S. person’s ability to pay or perform its swap obligations with respect to its swaps.”[16]

The concept of a guarantee is important to our cross-border rules for swap dealers in part because a guarantee of a non-US person’s swap obligations by a US person can require the non-US person—or its non-US counterparty—to count the swap towards its de minimis swap dealer registration threshold.  But when the determination of whether an entity must register with the CFTC depends on whether the entity’s or its counterparty’s obligations under a swap are guaranteed by a US person, the meaning of the term “guarantee” cannot be left to a review of “all the facts and circumstances.” 

A rule in which non-US persons must try to determine, or obtain representations from non-US counterparties regarding, whether the CFTC might subsequently conclude that a particular arrangement satisfies an open-ended definition of a “guarantee” is not a workable rule.  By contrast, the definition of a “guarantee” in the final rules, which is based on concepts of legal recourse and a legally enforceable right to recover, is clear and workable.  Some may downplay the importance of “workability” in Commission rulemakings, but no matter how well-intentioned a rule may be, if it is not workable, it cannot deliver on its intended purpose.   

Significant Risk Subsidiaries

Some commenters objected that the definition of a “significant risk subsidiary” inappropriately substitutes oversight by the Board of Governors of the Federal Reserve System (the FRB), and/or foreign regulatory authorities, for the Commission’s regulation of derivatives market activity overseas.  A significant risk subsidiary, or “SRS,” is a non-US “significant subsidiary” (based on various numerical metrics set out in the final rules) of an ultimate US parent entity that has more than $50 billion in global consolidated assets.  Excluded from the definition, however, are non-US subsidiaries that are subject to either:  1) consolidated supervision and regulation by the FRB as a subsidiary of a US bank holding company (BHC) or intermediate holding company (IHC); or 2) capital standards and oversight by the subsidiary’s home country supervisor that are consistent with Basel requirements and subject to margin requirements for uncleared swaps in a jurisdiction for which the Commission has issued a margin comparability determination.  It is these exclusions that commenters have cited as a concern.

To this, there are three responses.  First, as discussed above, in exercising the Commission’s oversight responsibilities with respect to an SRS (which, again, is a non-US subsidiary), we look to the risk that such a subsidiary poses to its ultimate parent in the United States, and thus to the US financial system.  It is not that we are replacing our oversight responsibilities with those of the FRB or foreign regulators.  Rather, it is that we have determined that the risk presented by foreign subsidiaries consolidated with a BHC or IHC, or subject to regulation as specified in the SRS definition in their home country, is already being adequately monitored and thus does not warrant an additional layer of regulation by the CFTC.

Second, we must compare the SRS definition in the final rules to what it replaces in the Guidance:  The “conduit affiliate.”  The Guidance did not actually define a conduit affiliate, but rather described it in terms of certain “factors.”  The most critical factor, but unfortunately also the most amorphous, was the last one, which asked whether “the non-U.S. person in the regular course of business, engages in swaps with non-U.S. third-party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with its U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates.”[17]

As with the definition of a “guarantee,” I make no apologies for supporting the workable definition of an SRS in the final rules, which is based on objective and observable metrics, as compared to the ambiguous description of a conduit affiliate set forth in the Guidance.  We owe the global swaps market the certainty that can only come from clarity in our rules, and the definition of an SRS in the final rules fits the bill.

Third, the record before us does not afford any basis on which to conclude that the definition of an SRS in the final rules will lead to any less robust Commission oversight of the cross-border swap activities of swap dealers than does the vague description of a conduit affiliate in the Guidance.  We have no evidence that the number of non-US entities that have waded through the multi-faceted conduit affiliate description in the Guidance and concluded that they were a conduit affiliate, but would conclude that they are not an SRS under the definition in the final rules, is significant—or even material.  If experience going forward proves otherwise, the Commission can always amend the SRS definition accordingly.  But absent such evidence, hypothetical concerns are an insufficient basis on which to reject the clear and workable SRS definition in the final rules.

ANE Transactions, Exceptions to Regulatory Requirements, and Substituted Compliance

Finally, some may see a retreat from the Guidance in the Commission’s determinations:  1) not to apply its group A, group B, or group C requirements[18] to swaps of a non-US swap dealer with a non-US counterparty where the non-US swap dealer uses personnel or agents in the United States to arrange, negotiate, or execute the swaps (ANE transactions); 2) to except certain foreign-based swaps from the group B and group C requirements; and 3) to expand the availability of substituted compliance to encompass group B requirements for swaps between a US branch of a non-US swap dealer and certain non-US counterparties.  I respectfully disagree.

First, the notion that the CFTC’s swap regulatory regime should apply to ANE transactions was not stated in the Commission’s Guidance; rather, it was stated in a staff Advisory published after the Guidance was adopted.  The Commission has never endorsed that staff view, and it has never taken effect.[19]  Second, the exceptions from swap dealer requirements that apply to the swaps of non-US swap dealers with non-US persons, again, generally codify exceptions that were included in the Guidance, too. 

To be sure, based on input we received in the comments, the final rules include two exceptions to swap dealer regulatory requirements that were not included in the Proposal.  Yet, to take one as an example, today’s release explains that the “Limited Swap Entity SRS/Guaranteed Entity Group B Exception” is:  1) tailored to placing foreign swap dealer subsidiaries of US firms on the same footing as foreign branches of US swap dealers; 2) consistent with an exception in the Guidance that was not carried forward in the Proposal;[20] and 3) limited in terms of the amount of swaps that can be entered into in reliance on the exception, and unavailable if the parties can rely on substituted compliance instead. 

But what is critically important for the treatment of ANE transactions, the exceptions to certain regulatory requirements, and substituted compliance in the final rules is to keep in mind the scenario at issue:  Although in some instances activity with respect to the swap may occur in the United States, the swaps involve non-US swap dealers (or foreign branches of US swap dealers) and a non-US counterparty (or a foreign branch of a US person) and, therefore, will also be subject to regulation in another jurisdiction.  Where the regulatory interest of that other jurisdiction is paramount, the CFTC should appropriately defer, just as where the Commission’s regulatory interest is paramount, we expect other foreign jurisdictions to defer to our regulation.  As I stated in connection with a recent Open Meeting that also addressed cross-border issues:

[T]he Commission’s historical commitment to appropriate deference to our international regulatory colleagues (which also is sometimes referred to as mutual recognition), ‘is a demonstration of international comity—an expression of mutual respect for the important interests of foreign sovereigns.’  This deference also reflects the shared goals of global authorities seeking to achieve the most effectively regulated markets through coordination rather than duplication.[21]

The Commission’s historical commitment to mutual recognition is in keeping with principles of international comity.  In reviewing the comment letters, frankly, there sometimes seems to be a sense that “international comity” is simply a buzzword the Commission invokes to justify what critics believe is an improper easing of its regulation of cross-border activity.  I emphatically reject the notion that appropriate deference to international regulatory authorities weakens oversight or protections of our markets, market participants, or financial system.  To the contrary, our reliance on international comity is deeply rooted in several sources.

First, as discussed in greater detail in the release, the Restatement (Fourth) of Foreign Relations Law of the United States counsels that even where a country has a basis for extraterritorial jurisdiction, it should not prescribe law with respect to a person or activity in another country when the exercise of such jurisdiction is unreasonable.[22]  This doctrine of reasonableness is “a principle of statutory interpretation”[23] that has been recognized in Supreme Court case law.[24]    

Second, Congress in Dodd-Frank specifically directed the Commission, “[i]n order to promote effective and consistent global regulation of swaps,” to “consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation . . . of swaps [and] swap entities . . .”[25]  Congress recognized that global swap markets cannot function absent consistent international standards.

Third, as I have previously observed on multiple occasions, when the G-20 leaders met in Pittsburgh in the midst of the financial crisis in 2009, they, too, recognized that due to the global nature of the derivatives markets, designing a workable solution, though complicated, demands coordinated policies and cooperation.[26]  To do otherwise would ignore the reality that modern markets are not bound by jurisdictional borders. 

And fourth, this Commission historically has been a global leader in its commitment to applying principles of international comity, in the form of mutual recognition, in a variety of contexts.  That commitment is reflected in the Commission’s Part 30 rules,[27] which apply to foreign firms “with respect to the offer and sale of foreign futures and options to U.S. customers and are designed to ensure that such products offered and sold in the U.S. are subject to regulatory safeguards comparable to those applicable to transactions entered into on designated contract markets.”[28]  It also is reflected in our approach (initially through staff no-action relief, and later through registration after Dodd-Frank) to foreign boards of trade (FBOTs) offering US participants “direct access” to enter trades directly into the FBOT’s order entry and trade matching systems.[29]  And just recently, it was reflected in the Commission’s proposal to amend Rule 3.10(c)(3) to permit non-US commodity pool operators to claim exemption from CFTC registration for offshore commodity pools with no US participants on a pool-by-pool basis.[30]

When the Commission issued the Guidance in 2013, only a few derivatives reforms had been adopted in a few other jurisdictions.  How things have changed since then.  Many of our fellow regulators in the world’s major financial centers have implemented reforms governing the conduct of swap dealers commensurate to our own, and extensive strides have been made (and continue to be made) towards international harmonization—thereby aligning our regulatory principles, just as the G-20 envisioned.  As a result, most swaps involving non-US counterparties today are expected to be subject to foreign regulatory requirements similar to the Commission’s own, unlike at the time the Guidance was adopted.[31]  Further, our deference to the comprehensive swap regulation of our international colleagues has been demonstrated by the fact that since the Guidance was issued, the CFTC has issued 11 comparability determinations regarding the regulation of swap dealers in the European Union, Canada, Japan, Australia, Hong Kong, and Switzerland.

Thus, regulation of global swap markets that imposes overlapping and duplicative requirements on swap dealers and their cross-border activities by multiple regulators is inconsistent with:  1) principles of statutory interpretation; 2) Congress’ direction to the Commission; 3) the vision of the G-20 Leaders at the Pittsburgh Summit; and 4) the Commission’s own longstanding commitment to international comity through mutual recognition of foreign regulatory regimes.  In a word:  It is not workable. 

Conclusion

In conclusion, I support codifying our prior cross-border Guidance into enforceable rules.  I believe that the final rules before us today are clear, sensible, and workable, and that they appropriately apply the Commission’s regulations to the cross-border activities of swap dealers.  They improve upon the Guidance based on our experience in administering the Dodd-Frank swap regulatory regime over the past several years, and they recognize the current state of global regulation of globally interconnected derivatives markets by carrying on this agency’s established tradition of mutual recognition and substituted compliance. 

I therefore support the final cross-border rules for swap dealers before us today.  I want to very much thank the staff of the Division of Swap Dealer and Intermediary Oversight, the General Counsel’s Office, and the Chief Economist’s Office for their efforts in preparing this rulemaking.  I am particularly appreciative of the time that the staff devoted to answering our diverse question—always in a thoughtful and comprehensive manner—and reviewing and addressing the various comments and requests from me and my team.