If you want to get something done in Washington, set a clock ticking. It is a town that responds to deadlines. We saw an example of this recently in the events that finally brought everyone onto the same page with regard to the extraterritorial consequences of swaps rules mandated by the Dodd-Frank Act.
On July 11, the EC and the US Commodity Futures Trading Commission announced their joint understanding as to how to approach cross-border derivatives.
It was on May 1 that the CFTC’s sister agency, the Securities and Exchange Commission, proposed its own new set of rules and interpretive guidance on cross-border security-based swaps. At that time and for weeks thereafter, the CFTC continued to take a more aggressive view than that of the SEC on extra-territorial impact.
Go Back a Year
The CFTC’s change of course came about, as many changes do, as the consequence of an artificially ticking clock. A year ago the agency published its “final exemptive order regarding compliance with certain swap regulations,” offering “temporary conditional relief from certain provisions of the CEA,” as amended by Dodd-Frank’s Section VII, the part of the Act specific to swaps.
According to that order, a non-U.S. person could register as a swap dealer or major swap participant while delaying “compliance with certain entity-level requirements” of that status. Also, foreign branches of U.S. SDs or MSPs could delay compliance with transaction-level requirements.
But the order also contained an alarm. It was set to expire on July 12, 2013.
On June 6, almost eleven months after the creation of that one-year exemption order, one month after the SEC granted its own permanent relief, the CFTC’s chairman, Gary Gensler, gave an address at the Sandler O’Neill conference in which he took the position that the exemption should simply be allowed to expire. We shouldn’t allow ourselves to forget, he said, that AIG Financial Products, the affiliate of AIG that “nearly brought down the U.S. economy,” was run out of London and run as a branch of a bank registered in France.
At some point in the future, Gensler envisioned, someone may call a U.S. Treasury Secretary with the news that a U.S. financial institution is failing because of its overseas swaps business. Gensler doesn’t want that to come about “because the CFTC back in 2013 knowingly left offshore operations out of common-sense reform.”
Brave words, but a clock was ticking and the EU wasn’t happy. Neither, it appears, was the Obama administration. Gensler became a lame duck soon after giving that speech. Gensler’s time as chairman ends as some as someone is sworn in to replace him, and Instead of nominating him for another term, the White House started talking up Amanda Renteria for that post. And Renteria, frankly, is seen as a lightweight, with almost no relevant experience.
Tick … tick … tick.
On June 20, those unhappy EU regulators met with the U.S. Treasury Secretary, Jacob Lew, the fellow who would be on the receiving end of the phone call Gensler had talked about. Lew decided the Eurocrats were right.
As July began, Lew and SEC chair Mary Jo White took a meeting with Gensler. Reports indicate the meeting was tense. Lew and White appear to have accomplished their purpose. Gensler began his retreat. By Tuesday, July 9, news reports described Gensler’s desire for a compromise in which some of the extra-territorial impact of the CFTC’s rules would be delayed until the end of the year.
On Thursday, July 11, just one day before the alarm was to go off: retreat completed. Ticking stopped.
The CFTC and EC announced their agreement, which they call their “Path Forward.” As DLA Piper has observed, the announcement is “light on details.” But this much is clear:
- A non-U.S. swap dealer will only be subject to transaction-level requirements in transactions with U.S. persons or guaranteed affiliates of U.S. persons.
- Where a swap is subject to joint jurisdiction with US and EU risk mitigation rules, compliance under the European Market Infrastructure Regulation (EMIR) will achieve compliance with relevant CFTC rules. The CFTC formalized this in a no-action letter.
Although cross-border swap dealers are likely happy about both of those two points, they are likely less happy about a third bullet point from the Path Forward:
- That in regard to mandatory clearing, in transactions where jurisdiction overlaps, the stricter rule will apply. Where exemptions from clearing would apply in one jurisdiction but not the other, the transaction will need to be cleared.