ISDA offers informal comments regarding the CFTC’s refined cross-border guidance on swaps

The International Swaps and Derivatives Association (ISDA) offered views on 27th August 2020 in relation to the changes that the Commodity Futures Trading Commission (CFTC) has made to the cross-border guidance on swaps (CFTC’s Cross-Border Swaps Rule) since its release in 2013. The guidance, which sets out how the CFTC would apply US rules in foreign jurisdictions; has since been refined in order to provide a much more appropriate regulatory landscape for swaps in order to properly balance the CFTC’s national interest in addition to suitable deference to international counterparts.

Scott O’Malia (ISDA’s CEO and prior Commissioner at the CFTC in 2013) shared his views on the recent changes. During O’Malia’s tenure at the CFTC in 2013, he advocated for further harmonization between the CFTC and foreign home country regulators where there were varying degrees of reform. Now, in 2020, the CFTC has recently transformed the guidance to one that will “defer to a much greater extent to foreign regulators and reduce the prospect of overseas swaps activity being subject to CFTC oversight unless it poses a material risk to the US. The collaborative attitude to overseas regimes is extremely welcome. ” says O’Malia.

The CFTC’s cross-border swaps rule is now based on the overall outcomes of the foreign jurisdiction and recognises that all G20 countries have already aligned to a similar swaps regulation pursuant to the Pittsburgh Accords[1]. As a result, the guidance is now more balanced and answers the fundamental question with regards to when the CFTC guidance should be triggered for swap dealing activity outside of US borders.

A summary of the key changes, include, but is not limited to:

  • The withdrawal of the “arrange, negotiate, execute” (ANE) rule. The original ruling meant that any transactions between a non-US swap dealer and non-US entity would be subject to CFTC oversight if any US-person was involved in organizing the trade, irrespective of where the risk resides;
  • Recognition that a large subset of derivatives activity is captured by the 2013 guidance, with very little relationship or impact to the US, and therefore would be better off overseen by the home country regulator;
  • Less extensive “US persons” definition, aligned to the US Securities and Exchange Commission (SEC) definition;

A statement released on 23rd July 2020 from the CFTC’s Chairman Heath P. Tarbert provides details in support for the new Cross-Border Swaps Rule. The Chairman concluded: “The final rule before us today provides a critical measure of regulatory certainty for the global swaps markets. I believe the rule is also a sensible and principled approach to addressing when foreign transactions should fall within the CFTC’s swap entity registration and related requirements. […] I sincerely hope our domestic and international counterparts will view today’s action as a positive step toward further cooperation to provide sound regulation to the global swaps markets.”

The revamped guidance will lay the foundation for market participants to align towards a more appropriate ruling without an incumbered regulatory landscape for swaps activities. As a result, the global derivatives market will be a much more stable and efficient ecosystem through this sustainable and collaborative approach.

For more information:

[1] Financial Stability Board, Annual Report on Implementation and Effects of the G20 Financial Regulatory Reforms 3 (Oct. 16, 2019) (showing that a very large majority of FSB jurisdictions have implemented the G20 priority reforms for over-the-counter derivatives).