Scott O'Malia, Commissioner, CFTC
"The entire guidance should be scrapped and the document should be re-drafted as a formal rulemaking that provides an opportunity for public comment and includes a cost-benefit assessment."
Fairfax, VA - The Commodity Futures Trading Commission (CFTC) should ditch the cross-border guidance entirely and use formal rule-making to establish the approach to cross-border application of Dodd-Frank, CFTC Commissioner Scott O'Malia said.
O'Malia, in a speech at Goerge Mason University just outside of Washington DC, listed a series of steps the regulator should take, starting with the abandonment of the current guidance approach.
"First, the entire guidance should be scrapped and the document should be re-drafted as a formal rulemaking that provides an opportunity for public comment and includes a cost-benefit assessment," O'Malia said.
"Second, the proposal should provide a clear, consistent interpretation of the 'direct and significant' connection with a sufficient rationale for the extent of the Commission's extraterritorial reach," he said.
O'Malia said that by identifying more accurately those activities that could pose a risk to the US, it could assess how such risk could be mitigated through clearing and determine whether other transaction rules must be applied.
"Third, the definition of US person should be narrowed to include only those entities that are residents of the US, are organised or have a principle place of business in the US, or have majority US ownership. It should exclude a foreign affiliate or subsidiary of a US end user that is guaranteed by that end user. This more reasonable definition is similar to the definition articulated by Commission staff in one of the flurry of no-action letters issued on October 12."
Finally, O'Malia said, the rule must clearly interpret the concept of "substituted compliance". He said the proposal indicates that the Commission will review the comparability of non-US regulations with Commission rules.
"This review should be a broad, big-picture assessment of comparability, not a rule-by-rule analysis. A rule-by-rule comparison could result in a hodgepodge of disparate regulatory requirements that would be a compliance nightmare for market participants," he said, adding that it would also undermine the coordinated regulatory effort that G20 members have agreed to support.
A CFTC official last week suggested the CFTC's desire that foreign regulators had "comparable and comprehensive" measures did not mean the CFTC was looking for identical regulations abroad.
CFTC staff member Carlene Kim, who was leading efforts in this area, said the comparability assessment "does not entail a rule-by-rule analysis", but rather the CFTC would approach the matter "on a category-by-category basis".
But O'Malia said the Commission needs to engage much more actively and meaningfully with foreign regulators and develop a more harmonised approach in order to eliminate redundancy and inconsistency among the respective regulatory regimes.
"The bottom line is that today's swaps markets are global in nature and interconnected," he said.
O'Malia also noted that the Commission has yet to consider final rules on capital and margin requirements. The Volcker rule, which will clarify and distinguish market-making trades from proprietary trading, is also in this category, he said.
"These rules will put a final price tag on over-the-counter trades and will have broad and significant consequences for the swaps markets, so it is very important that we get them right. If we make sure to identify concerns raised by market participants and properly address them in the final rules, and then implement the rules in a measured and consistent manner, I am confident that we can get them right."
O'Malia also called for Swap Execution Facility rules to allow for flexible methods of execution including request for quote systems, and to provide a clear interpretation of the "by any means of interstate commerce" clause contained in the SEF definition.
He said the Commission is considering the suite of related execution rules that determine the viability of SEFs and the overall OTC market, including mandatory clearing, Core Principle 9, and the block and made available for trading rules in addition to the SEF rules.
"I remain optimistic that we can develop rules that will encourage a competitive and innovative market in swap trading as envisioned by Congress and something the market has been developing over the past decade. It would be a shame if government rules stood in the way of this opportunity," he said.