Securities Regulation Daily Wrap Up, SWAPS—CFTC’s Quintenz fires back at fellow commissioner over Giancarlo swaps paper, (Nov 30, 2018)

By John M. Jascob, J.D., LL.M.

CFTC Commissioner Brian Quintenz has taken issue with a fellow commissioner’s criticism of the white paper on cross-border swaps regulation released by Chairman J. Christopher Giancarlo. Speaking in Singapore at FIA Asia 2018, Quintenz expressed strong support for Giancarlo’s substantive approach to revising the CFTC’s cross-border framework to better reflect current realities in the derivatives markets. Quintenz went further, however, in defending the form and manner in which Giancarlo launched his views, saying that regulatory white papers can play a productive role in policy formation by employing a philosophical format that fosters dialog and signals direction.

Giancarlo white paper. Quintenz began by praising his Singaporean hosts for their success in transforming the city-state into a global hub for finance, trade, technology, and culture, a development which he attributed to Singapore’s high degree of economic freedom. Quintenz noted that in his own visit to Singapore in September, Chairman Giancarlo had presented a vision for the cross-border regulation of the global swaps market that sought to reverse the CFTC’s overly expansive extraterritorial approach that has at times caused market fragmentation and subjected market participants to duplicative and costly regulation. After his visit, Giancarlo published a white paper with specific recommendations to improve the CFTC’s cross-border approach.

CFTC Commissioner Rostin Behnam took sharp issue with the white paper, however, criticizing the chairman for utilizing the white paper as an on-ramp for regulatory reform. Specifically, Behnam stated when a federal agency in the U.S. seeks public participation in the formulation of a regulatory change, it does not use white papers. Instead, federal agencies, like the CFTC, follow a statutorily mandated notice and comment process under the Administrative Procedure Act. Quintenz disagreed, saying that regulatory white papers can help to shape policy, aid international cooperation, and build consensus. "It is my belief that a majority of the Commissioners at the CFTC will indeed find a consensus on restructuring the agency’s cross border approach in the coming months," Quintenz said (emphasis in original).

Turning to Giancarlo's substantive recommendations, Quintenz supported the white paper’s approach toward making substituted compliance determinations that distinguishes between swaps reforms intended to address the systemic risk reforms at the heart of Dodd-Frank, such as margin and clearing, and those reforms designed to address market trading practices, such as methods of trade execution. This approach would apply a strong comparability standard to the first while applying a more flexible standard to the latter, Quintenz said. More generally, Quintenz supports a substituted compliance framework that measures comparability by whether a legal regime achieves comparable outcomes, instead of requiring a finding of comparability on a provision-by-provision basis. In his view, this outcomes-based approach will only increase the efficacy of the G-20 reforms and strengthen the global commitment to a transparent, well-regulated, liquid swaps market.

Non-U.S. CCPs. Regarding the regulation of non-U.S. central counterparties (CCPs), Quintenz supports the white paper’s recommendation to expand the use of the CFTC’s exemptive authority for non-U.S. CCPs that do not pose substantial risk to the U.S. financial system. Specifically, exempt CCPs would be permitted to provide swaps clearing services to U.S. customers through non-U.S. clearing members without triggering DCO or FCM registration, provided that the foreign jurisdiction has implemented comparable CCP regulation. And while CCPs posing a substantial risk to the U.S. financial system would continue to be registered with the CFTC, Quintenz supports the white paper’s position that the home country regulator should still have supervisory primacy, with the CFTC primarily focused on U.S. clearing activity. Quintenz added that he also looks forward to working with staff to develop a clearer definition of "substantial risk" that is appropriately tailored to a CCP's true, substantial risk to the U.S. financial system and not just a generic view towards any entity’s universal size.

Registration of swap execution facilities and swap dealers. Quintenz also supports the white paper’s general view that swaps trading venues subject to comparable regulation abroad should be exempt from swap execution facility (SEF) registration with the CFTC. In addition, Quintenz supports the approach suggested in the white paper that U.S. persons should be allowed to access non-U.S. platforms in non-comparable jurisdictions without triggering SEF registration subject to a materiality threshold. In his view, requiring SEF registration due to the participation of a few U.S. persons is not appropriate. In determining the materiality threshold, Quintenz suggests looking at several factors, including the percentage of the venue’s trading volume executed by U.S. persons, as well as whether the venue directly solicits U.S. participation.

Quintenz also agrees with the white paper’s approach to identifying the swaps that count toward a non-U.S. person’s de minimis threshold for swap dealer registration. With respect to comparable jurisdictions, Quintenz observed, the white paper recommends that non-U.S. persons, including foreign consolidated subsidiaries (FCS) whose ultimate parent is a U.S. person, only count their swap dealing activity with U.S. persons and guaranteed entities, with certain exceptions. In his view, the optimal solution is for the CFTC and comparable jurisdictions to recognize and defer to one another’s regulatory authority over swaps activity that does not directly involve their respective domestic firms. With respect to swap dealing activity in non-comparable jurisdictions, Quintenz sees potential merit in the white paper's suggestion that FCS that are part of bank holding companies should only be required to include their dealing activity with U.S. persons in their de minimis count. This outcome may be appropriate, Quintenz believes, given that these bank holding companies are already subject to consolidated supervision and regulation by U.S. prudential regulators.

RegulatoryActivity: CFTCNews ClearanceSettlement CommodityFutures Derivatives DoddFrankAct InternationalNews Swaps