Derivatives: Regulatory roulette

December 2013


Determining Dodd-Frank conformance obligations is a little like gambling at the roulette table; every spin yields a different result. Releases by the CFTC over the last several months – and days – have left industry participants and platforms alike re-evaluating what they have to comply with and when. Not only has each release introduced its own particular ambiguities regarding the extraterritorial reach of Dodd-Frank, but collectively they have raised a larger question, namely: when will the wheel stop turning?

The CFTC’s most recent round of cross-border interpretation has caused confusion and consternation among market participants. For relief, some have started placing their bets on a recently filed lawsuit that seeks to undo much of the CFTC’s cross-border regime. Three key regulatory pronouncements at issue are the following:

  • In July, the CFTC’s Final Cross-border Guidance (“Cross-border Guidance”) expanded the interpretation of “US person” to now include counterparties (and as a consequence, transactions) previously thought to be outside CFTC jurisdiction. In a companion order, the CFTC effectively gave non-US dealers and foreign branches of US dealers until December 21st to conform with either CFTC requirements or comparable local law.
  • However, on November 14th, a CFTC staff “advisory” stated that registered non-US person swap dealers (“SDs”) must comply with “transaction level” requirements (including those related to execution and clearing) when entering into a swap with a non-US person if the swap is arranged, negotiated, or executed by personnel or agents of the non-US SD located in the US. A subsequent no-action letter in late November indicated that compliance with this is not required until January 14, 2014.
  • Finally, on November 15th, staff guidance stated that non-US multilateral swap trading platforms must register with the CFTC if the platforms allow US persons (or persons located in the US such as personnel and agents of non-US persons) to trade or execute swaps on the platform (either directly or indirectly through an intermediary).

The flurry of documents was undoubtedly intended to provide the industry with the CFTC’s view of the scope of its jurisdiction. The reality, however, is that rather than fostering clarity, each new piece of guidance has raised new issues, making uncertainty and fragmented liquidity the new normal. See “Division of Market Oversight Guidance on Application of Certain Commission Regulations to Swap Execution Facilities” (Nov. 15, 2013).

These latest releases re-confirm three important lessons that are perhaps fairly obvious by now: First, the CFTC is not afraid to flex its jurisdictional muscle, even if its reach appears too far to some. Second, the fits-and-starts approach to regulatory guidance continues. Third, it is dangerous to bet the bank on the ultimate significance of any of these ever-moving compliance dates.

This Financial Services Regulatory Brief analyzes each of the three key CFTC releases since July, and suggests where your chips should be placed with these lessons in mind.

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Dan Ryan
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