Analysis – Asian concern over CFTC guidance
Singapore, 31 August (Argus) — Australia, Hong Kong and Singapore are raising concerns about US commodities regulator the CFTC's proposed guidance for handling cross-border derivatives transactions, warning that the proposal could increase systemic risk. The CFTC issued guidance on 29 June to indicate how it plans to apply rules to overseas swaps transactions that have a significant effect on US commerce, as called for under the 2010 Dodd-Frank Wall Street reform law.
The guidance is designed to clarify when firms must register as swap dealers with the CFTC. Swap dealer registration is one of the agency's key gateways to regulating swaps. Registered companies are required to clear certain swaps, hold specific amounts of margin and capital, and report their transactions. Banks and some commercial energy companies, including BP and Shell, could be determined to be swap dealers.
The CFTC guidance contemplates foreign swap dealers and “major swap participants” — companies that hold large positions in swaps — being exempt from US regulation if a home government has a regulatory regime similar in scope to that of the US.
Regulators from Australia, Hong Kong and Singapore sent a letter to CFTC chairman Gary Gensler on 27 August calling for a reassessment of the guidance and greater flexibility in its implementation. The guidance “may have significant effects on financial markets and institutions outside of the US” if left unchanged, they say.
The guidance could result in possible market disruption or fragmentation and could undermine stability and market liquidity if market participants have to change their business models or withdraw from certain businesses. The effects on compliance costs and liquidity of the over-the-counter (OTC) derivatives market “should not be underestimated”, the regulators say.
The Asia-Pacific regulators want the CFTC to clarify which foreign jurisdictions are deemed to have regulatory regimes comparable to the US. Australia, Hong Kong and Singapore are still studying “whether local market liquidity can justify implementation of mandatory trading of OTC derivatives products on exchanges or electronic trading platforms.”
They suggest the US consider whether other countries comply with standards set by groups such as the International Organisation of Securities Commissions or the Basel Committee on Banking Supervision. Greater US reliance on the supervisory regimes of other countries “would better achieve the concept of international comity”, the Asia-Pacific regulators say.
The CFTC declined to comment on the letter.
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