Newly proposed cross-border regulations issued by the US Commodity Futures Trading Commission have made waves across the globe, with nine overseas finance officials urging US Treasury Secretary Jacob J. Lew to limit the cross-border reach of Dodd-Frank Act swaps rules. In an
April 18, letter, finance officials from Brazil, France, Germany, Italy, Japan, Russia, South Africa, Switzerland, the UK, and Michel Barnier, the European Commissioner for Internal Market and Services, said that new US swaps regulations are fragmenting the $639 trillion global market. They worry that a lack of coordination of regulators' efforts without clear direction from global policymakers and regulators will cause derivatives markets to "recede into localized and less efficient structures, impairing the ability of business across the globe to manage risk."
The simultaneous application of multiple rules to cross-border activity will result in conflicting, inconsistent or duplicative requirements on market participants, which could be a real barrier to such trading. Where two jurisdictions each have rules which ensure equivalent regulatory outcomes are achieved, requiring a cross-border trade to comply simultaneously with both sets of rules is disruptive, costly and unnecessary.
The CFTC has proposed cross-border swaps regulations covering transactions involving overseas affiliates and subsidiaries of US banks and hedge funds incorporated offshore. The April 18 letter reacts to these proposals. The proposals have stirred some debate within the US as well. Concerns over the international reach of the CFTC’s swaps rules has prompted US lawmakers to introduce legislation that would restrict the agency's ability to regulate cross-border swaps activities by, among other things, exempting traders in the G-20 nations from the US the regulations.
The April 18 letter pushes for greater use of substituted compliance, in which one jurisdiction allows another’s to satisfy goals to curb risk in the market. Individual companies shouldn’t need to apply for substituted compliance, and regulators in different jurisdictions should not require a precise rule-by-rule test of comparability, they said.
It also runs the risk of encouraging market fragmentation, as participants are deterred from transacting cross-border. We therefore cannot see a workable regime functioning without a
comprehensive global commitment to the principle of substituted compliance . . .
. . .
differences in national legal regimes and market customs make it unfeasible to achieve identical regulatory frameworks. As such, when assessing equivalence, it will be vital to assess whether the outcome delivered by the rules is equivalent in terms of the protections provided, and not to seek a precise rule-by-rule match up. International standards are key to facilitating the establishment of equivalence between different jurisdictions;
The US is furthest along in the international community with respect to the regulation of over-the-counter derivatives, followed closely by Japan. US officials have maintained that they have coordinated closely with their counterparts abroad, and newer proposals like the SEC's cross-border rules for securities based swaps do rely heavily on the concept of substituted compliance. It is clear that the nine authors of the April 19 letter see substituted compliance and regulatory harmonization as key to the question of cross-border regulation.
In this regard, mutual recognition, substituted compliance, exemptions, or a combination of these would all be a valid approach, and careful consideration should be given with respect to registration requirements for firms operating across borders.