CFTC cross-border guidance a threat to ‘systemic stability’, say Asian regulators

Leading regulators from across Asia complain of the potentially negative impact of the US regulator’s latest proposals

Regulators from across Asia warn the Commodity Futures Trading Commission (CFTC) that "unintended consequences" of market fragmentation and systemic risk may arise in non-US markets if the US agency implements its proposals for cross-border swap dealing activities as part of the Dodd-Frank act.

The Australian Securities and Investments Commission, Reserve Bank of Australia, Hong Kong Monetary Authority, Securities and Futures Commission and Monetary Authority of Singapore raised a number of concerns in a joint open letter written to CFTC chairman Gary Gensler.

The CFTC's guidance sets out a framework under which non-US swaps entities and foreign subsidiaries of US banks can apply foreign rules that are equivalent to Dodd-Frank. This approach is known as substituted compliance, which is meant to ensure banks aren't forced to apply multiple sets of different regulations across jurisdictions.

The CFTC's guidance covers areas including an interpretation of what constitutes a US person, whether a non-US entity's swap dealing activities are sufficient to require registration as a swap dealer and if a non-US person's swap positions are sufficient to require registration as a major swap participant.

The CFTC published the initial guidance on June 29, to industry complaints that the rules on extraterritoriality were confusing and inconsistent. The Asian regulators behind the open letter, published on Monday after close of business in the Asian time zones, also complain of a lack of clarity and specificity in various aspects of the document.

The Asian regulators say subjecting non-US entities to the swap dealer or major swap participant registration requirements, on top of entity-level and transaction level requirements, could still force non-US firms to have to comply with regulations imposed by both the US and local bodies that could overlap and differ.

The regulators also state that such requirements could lead to potential market fragmentation, which increases the risks to "systemic stability and market liquidity in [their] markets, as participants could be forced to substantially change their business models or withdraw entirely from certain business areas in a relatively short period of time".

The letter sets out five recommendations to the CFTC. They include a request to defer application of the guidelines to non-US entities until a greater international consensus on implementation has been reached; more clarity over the definition of a US person, which they say is different to that used in other US regulations; greater clarity over the assessment of substituted compliance; a staggered implementation outside of the US to minimise market disruption; and temporary exemption for non-US swap dealers and major swap participants. For the final point, they additionally ask for a more simplified regulatory approach for recognising non-US central counterparties.

The Asian regulator's move follows a similar letter sent jointly by the Japanese Financial Services Authority and the Bank of Japan on August 13, which raised similar concerns and also recommended deferral on implementation for non-US firms.