Cross-border swap questions haunt market as CFTC weighs next step

First Published 6th June 2013

The CFTC chairman outlined elements of what should be in the final rules for cross-border swap activity, while one commissioner called for more time to work through some thorny issues.

Gary Gensler, Chairman, CFTC

Gary Gensler, Chairman, CFTC

"Our job ... is to protect the American public."

Washington DC - The chairman of the Commodity Futures Trading Commission (CFTC) outlined four critical elements that must be contained in final guidance on cross-border swap activity, while one of the regulator's five commissioners made a plea for more time to consider the best way forward.

The CFTC has given temporary relief from the cross-border application of Dodd-Frank rules for the multi-trillion-dollar swap market, but that relief expires on July 12.

"The Commission's cross-border interpretation undoubtedly will have a significant effect on global markets and market participants," said Commissioner Scott O'Malia, who called for an extension of the relief from cross-border rules.

"Given all that is at stake, and given the looming July 12 deadline, it is imperative for the Commission to have a viable backup plan; failing to do so would be utterly irresponsible."

CFTC Chairman Gary Gensler, who has long called for rules under Dodd-Frank to cover a wide array of activities beyond US shores, listed the key elements that he said needed to be in the final guidance. Those were:

- Dodd-Frank must cover swaps between non-US dealers and guaranteed affiliates of "US persons" or between two guaranteed affiliates;

- The US person definition must include offshore hedge funds and vehicles that are majority-owned by US persons or have principal place of business in the United States;

- While foreign branches of US firms can use local rules, CFTC's guidance must ensure the definition of a foreign branch is bona fide and that the swap is actually entered into by that branch;

- Swap dealers - foreign or US - transacting with US persons within the United States are to comply with Dodd-Frank.

Gensler's stance has so far come under a fair amount of beyond-the-scenes criticism from foreign regulators, who believe the practice of "substituted compliance" should be observed whereby comparative local regulation would govern activity outside the United States.

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