[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
DODD-FRANK DERIVATIVES REFORM:
CHALLENGES FACING U.S. AND INTERNATIONAL MARKETS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
GENERAL FARM COMMODITIES
AND RISK MANAGEMENT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
DECEMBER 13, 2012
__________
Serial No. 112-35
Printed for the use of the Committee on Agriculture
agriculture.house.gov
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77-833 WASHINGTON : 2013
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COMMITTEE ON AGRICULTURE
FRANK D. LUCAS, Oklahoma, Chairman
BOB GOODLATTE, Virginia, COLLIN C. PETERSON, Minnesota,
Vice Chairman Ranking Minority Member
TIMOTHY V. JOHNSON, Illinois TIM HOLDEN, Pennsylvania
STEVE KING, Iowa MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas LEONARD L. BOSWELL, Iowa
K. MICHAEL CONAWAY, Texas JOE BACA, California
JEFF FORTENBERRY, Nebraska DAVID SCOTT, Georgia
JEAN SCHMIDT, Ohio HENRY CUELLAR, Texas
GLENN THOMPSON, Pennsylvania JIM COSTA, California
THOMAS J. ROONEY, Florida TIMOTHY J. WALZ, Minnesota
MARLIN A. STUTZMAN, Indiana KURT SCHRADER, Oregon
BOB GIBBS, Ohio LARRY KISSELL, North Carolina
AUSTIN SCOTT, Georgia WILLIAM L. OWENS, New York
SCOTT R. TIPTON, Colorado CHELLIE PINGREE, Maine
STEVE SOUTHERLAND II, Florida JOE COURTNEY, Connecticut
ERIC A. ``RICK'' CRAWFORD, Arkansas PETER WELCH, Vermont
MARTHA ROBY, Alabama MARCIA L. FUDGE, Ohio
TIM HUELSKAMP, Kansas GREGORIO KILILI CAMACHO SABLAN,
SCOTT DesJARLAIS, Tennessee Northern Mariana Islands
RENEE L. ELLMERS, North Carolina TERRI A. SEWELL, Alabama
CHRISTOPHER P. GIBSON, New York JAMES P. McGOVERN, Massachusetts
RANDY HULTGREN, Illinois JOHN GARAMENDI, California
VICKY HARTZLER, Missouri
ROBERT T. SCHILLING, Illinois
REID J. RIBBLE, Wisconsin
KRISTI L. NOEM, South Dakota
______
Professional Staff
Nicole Scott, Staff Director
Kevin J. Kramp, Chief Counsel
Tamara Hinton, Communications Director
Robert L. Larew, Minority Staff Director
______
Subcommittee on General Farm Commodities and Risk Management
K. MICHAEL CONAWAY, Texas, Chairman
STEVE KING, Iowa LEONARD L. BOSWELL, Iowa, Ranking
RANDY NEUGEBAUER, Texas Minority Member
JEAN SCHMIDT, Ohio MIKE McINTYRE, North Carolina
BOB GIBBS, Ohio TIMOTHY J. WALZ, Minnesota
AUSTIN SCOTT, Georgia LARRY KISSELL, North Carolina
ERIC A. ``RICK'' CRAWFORD, Arkansas JAMES P. McGOVERN, Massachusetts
MARTHA ROBY, Alabama DAVID SCOTT, Georgia
TIM HUELSKAMP, Kansas JOE COURTNEY, Connecticut
RENEE L. ELLMERS, North Carolina PETER WELCH, Vermont
CHRISTOPHER P. GIBSON, New York TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois ----
VICKY HARTZLER, Missouri
ROBERT T. SCHILLING, Illinois
Matt Schertz, Subcommittee Staff Director
(ii)
C O N T E N T S
----------
Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa,
opening statement.............................................. 4
Conaway, Hon. K. Michael, a Representative in Congress from
Texas, opening statement....................................... 1
Prepared statement........................................... 2
Submitted correspondence..................................... 50
Crawford, Hon. Eric A. ``Rick'', a Representative in Congress
from Arkansas, submitted statements:
Boleat, Mark, Chairman, Policy and Resources Committee,
City of London......................................... 48
Maijoor, Steven, Chair, European Securities and Markets
Authority.............................................. 47
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma,
opening statement.............................................. 24
Neugebauer, Hon. Randy, a Representative in Congress from Texas,
submitted letter............................................... 74
Scott, Hon. David, a Representative in Congress from Georgia,
opening statement.............................................. 4
Submitted statement on behalf of Americans for Financial
Reform..................................................... 76
Witnesses
Chilton, Hon. Bart, Commissioner, Commodity Futures Trading
Commission, Washington, D.C.................................... 6
Prepared statement........................................... 7
Sommers, Hon. Jill E., Commissioner, Commodity Futures Trading
Commission, Washington, D.C.................................... 9
Prepared statement........................................... 10
Kono, Masamichi, Vice Commissioner for International Affairs,
Financial Services Agency of Japan; Chairman of the Board,
International Organization of Securities Commissions, Tokyo,
Japan.......................................................... 12
Prepared statement........................................... 14
Pearson, Patrick, Head, Financial Market Infrastructures Unit,
Internal Market and Services Directorate General, European
Commission, Brussels, Belgium.................................. 18
Prepared statement........................................... 20
DODD-FRANK DERIVATIVES REFORM:
CHALLENGES FACING U.S. AND INTERNATIONAL MARKETS
----------
THURSDAY, DECEMBER 13, 2012
House of Representatives,
Subcommittee on General Farm Commodities and Risk
Management,
Committee on Agriculture,
Washington, D.C.
The Subcommittee met, pursuant to call, at 8:59 a.m., in
Room 1300 of the Longworth House Office Building, Hon. K.
Michael Conaway [Chairman of the Subcommittee] presiding.
Members present: Representatives Conaway, King, Neugebauer,
Austin Scott of Georgia, Crawford, Huelskamp, Ellmers, Gibson,
Hultgren, Hartzler, Lucas (ex officio), Boswell, Walz,
McGovern, David Scott of Georgia, Courtney, Welch, Sewell, and
Garamendi.
Staff present: Tamara Hinton, Kevin Kramp, Josh Mathis,
John Porter, Matt Schertz, Nicole Scott, Suzanne Watson, Jason
Goggins, Liz Friedlander, C. Clarke Ogilvie, John Konya, Debbie
Smith, and Caleb Crosswhite.
OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE
IN CONGRESS FROM TEXAS
The Chairman. All right. This hearing of the Subcommittee
on General Farm Commodities and Risk Management to review Dodd-
Frank derivatives reform and the challenges facing U.S. and
international markets will come to order. A bit of a brief
explanation, we have votes around 11 o'clock, and with the
gracious consent of our four presenters today, we have combined
the two panels into one in an attempt to make sure that we
respect the fact that the U.S. regulators are here as well as
our foreign regulators who have come a long way to visit with
us. And to only get through one panel and then leave to go vote
and that covey of quail disbursement looking thing that happens
when we finish votes is disrespectful, so we have combined them
into one. And we ask unanimous consent that Mr. Garamendi, who
is not yet on the Committee, will be joining us today if
everybody is okay with that. All right.
The Subcommittee is honored to have Commissioner Jill
Sommers and Commissioner Bart Chilton from the United States
Commodity Futures Trading Commission to join us today. In
addition, we have Mr. Masamichi Kono from the Financial
Services Agency of Japan and Mr. Patrick Pearson from the
European Commission. And I believe this is the first time the
United States Congress has welcomed international regulators to
testify with respect to the Dodd-Frank Act. And I want to thank
them for traveling to Washington, D.C., to appear before us
today and we are looking forward to their testimony.
Today's meeting of the General Farm Commodities and Risk
Management Subcommittee continues a series of hearings that
started in 2011 aimed at examining problems that have arisen as
regulators continue to work through the Dodd-Frank rulemaking
process. This summer, the CFTC issued its proposed cross-border
guidance to the marketplace for review and comment. What
followed was an almost universal outcry of foreign governments
and international regulators. Regulators who oversee the vast
majority of derivatives markets outside the United States
expressed deep concerns that the CFTC's proposed application of
Dodd-Frank outside of the U.S. borders.
Respect for equivalent, but not identical, regulatory
standards has been a cornerstone of international banking
regulations for decades. But now, the CFTC, pushed by Mr.
Gensler, appears poised to rewrite that standard of
international cooperation and extend the reach of U.S. law to
regulate activity in foreign jurisdictions over the objections
of the sophisticated and accountable regulators.
I understand the international regulators have met with the
Chairman and his staff several times in recent months to
discuss how to resolve these cross-border concerns. However,
based on his testimony yesterday to the Financial Services
Committee, it does not appear that the Chairman is ready to
accept that foreign efforts and regulatory reform will be
equivalent to the rule proposed by the CFTC. Without a
willingness to trust international regulators and their ability
to regulate their own markets, I fear that next month's talks
in Brussels will be just that--more talk.
A major concern voiced by international regulators is that
the global derivatives markets may become regionalized as
institutions and customers transact a majority of business
within their home jurisdictions. Such an outcome would
concentrate risk in various economies and sectors of the world.
Here at home, American end-users who use swaps to manage
everyday business risk may have fewer counterparties to deal
with. Fewer counterparties will of course mean less competition
and less liquidity in the market and, I believe, will lead to
higher costs for those end-users and a higher concentration of
risks in the United States. With our economy facing an
uncertain future, we can ill afford to implement reforms
without a good faith attempt to cooperate with the
international community so we do not negatively impact global
markets.
Getting the Dodd-Frank regulatory scheme right is more
important than getting it done quickly. Congress can never
become complacent. Our work did not end when this law was
signed by the President in 2010. Examining the rulemaking
process for errors, unfair instructions, or unintended
consequences and then fixing the mistakes is the essential part
of our job.
I want to thank all the Members of the Subcommittee on both
sides of the aisle for their continued commitment to good
oversight. It is important that Dodd-Frank, irrespective of our
ideological differences, is implemented in a way that is
logical and fair and beneficial for the participants who depend
on the financial markets.
[The prepared statement of Mr. Conaway follows:]
Prepared Statement of Hon. K. Michael Conaway, a Representative in
Congress from Texas
Good morning, thank you all for joining us for this important
hearing to examine challenges facing U.S. and international markets as
we continue implementing the Dodd-Frank Act.
The Subcommittee is honored to have Commissioner Jill Sommers and
Commissioner Bart Chilton from the U.S. Commodity Futures Trading
Commission join us today.
In addition, I would like to extend a warm welcome to Mr. Masamichi
Kono from the Financial Services Agency of Japan and Mr. Patrick
Pearson from the European Commission.
I believe this is the first time the U.S. Congress has welcomed
international regulators to testify with respect to the Dodd-Frank Act,
and I thank them for traveling to Washington to appear before us--we
look forward to their testimony.
Today's meeting of the General Farm Commodities and Risk Management
Subcommittee continues a series of hearings that started in 2011 aimed
at examining problems that have arisen as regulators continue to work
through the Dodd-Frank rulemaking process.
This summer the CFTC issued its proposed cross-border guidance to
the marketplace for review and comment. What followed was the almost
universal outcry of foreign governments and international regulators.
Regulators who oversee the vast majority of derivatives markets
outside of the United States expressed deep concerns at the CFTC's
proposed application of the Dodd-Frank Act outside of the U.S. borders.
Respect for equivalent, but not identical, regulatory standards has
been a cornerstone of international banking regulation for decades. But
now the CFTC, pushed by Chairman Gensler, appears poised to rewrite the
standards of international cooperation and extend the reach of U.S. law
to regulate activity in foreign jurisdictions over the objections of
the sophisticated and accountable regulators.
I understand that international regulators have met with the
Chairman and his staff several times in recent months to discuss how to
resolve these cross-border concerns. However, based on his testimony
yesterday in the Financial Services Committee, it does not appear that
Chairman Gensler is ready to accept that foreign efforts at regulatory
reform will be equivalent to the rules proposed by the CFTC.
Without a willingness to trust international regulators and their
ability to regulate their own markets, I fear that next month's talks
in Brussels will be just that, more talk.
A major concern voiced by international regulators is that the
global derivatives market may become regionalized as institutions and
customers transact a majority of business within their home
jurisdictions. Such an outcome would concentrate risk in various
economies and sectors of the world.
Here at home, American end-users who use swaps to manage everyday
business risks may have fewer counterparties to deal with. Fewer
counterparties will mean less competition and less liquidity in the
market, which will lead to higher costs for end-users and a higher
concentration of risk in the United States.
With our economy facing an uncertain future, we can ill-afford to
implement reforms without a good faith attempt to cooperate with the
international community so we do not negatively impact global markets.
As I have said, getting Dodd-Frank right is more important than
getting it done quickly. Congress can never become complacent; our work
did not end when this law was signed by the President in 2010.
Examining the rulemaking process for errors, unclear instructions, or
unintended consequences, and then fixing the mistakes is an essential
part of our job.
I want to thank all the Members of this Subcommittee, on both sides
of the aisle, for their continued commitment to good oversight. It is
important that Dodd-Frank, irrespective of our ideological differences,
is implemented in a way that is logical, fair, and beneficial for the
participants who depend on the financial markets.
With that, I will turn to our Ranking Member, Mr. Boswell, for his
opening remarks and then to our witnesses.
The Chairman. With that, I will turn to our Ranking Member,
Mr. Scott, for his opening remarks and then we will move on to
our witnesses. Mr. Scott?
OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN
CONGRESS FROM GEORGIA
Mr. David Scott of Georgia. Thank you very much, Chairman
Conaway. Chairman, I had to do sort of a double-check on the
calendar on the way over here this morning to make sure that it
was really December 2012 and not December 2010 because I sort
of had a serious case of deja vu while walking over. It seems
like we have had countless hearings over the last few years on
the issues before us today, so many that they are starting to
sort of blur together in my mind. And yet, after fielding more
complaints about a lack of timing and coordination on behalf of
the CFTC and their implementation of Dodd-Frank regulations on
derivatives transactions, here we are once again trying to get
answers to the questions that we have been asking ever since
the beginning.
Now, make no mistake about it, the complaints I--and I am
sure others--have heard are not just market participants crying
wolf. The consequences of poor sequencing of rules and
implementation dates, poor coordination both with other
domestic regulators and foreign regulators as well, are real
and they are very damaging to U.S. companies. As we saw earlier
this year, domestic banks can and they will lose business to
foreign competitors if Title VII rules are not implemented
properly and in a timely fashion. And that will in turn harm
the end-user companies that they serve and that we on this
Committee care so very much about.
So again, Chairman Conaway, I want to thank you for holding
the hearing. I hope we can make some progress on getting to the
bottom of an issue that has frustrated us for some time now
and, at the very least, remind the CFTC that they need to do
better in implementing Title VII of Dodd-Frank.
Thank you, Mr. Chairman.
The Chairman. Thank you, Mr. Scott.
Before we turn to our witnesses, I would like to, with
unanimous consent, yield a couple of moments to Mr. Boswell, my
Ranking Member, who I have worked with for years now and is a
good friend. So, Mr. Boswell?
OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE
IN CONGRESS FROM IOWA
Mr. Boswell. Well, thank you very much, Mr. Chairman. And I
just want to make some, if I could, farewell remarks.
You know, I have no animosity about anything that has
happened. This place works as it works and we all know that.
And it has been a privilege to work with you, Mr. Chairman, and
your predecessor, and back when I was chair and all those
things. But we have a tremendous responsibility, so as the
patriarch of this Committee, I guess, age has something to do
with it. And Mr. King, you don't have to smile that much. Yes,
I am much older than you.
But anyway, as I look out here at Mr. Chilton and some of
the rest of you who I have learned a lot about and you have
taught us a lot, and it is a tremendous responsibility here.
And I think back to the debacle that took place and what
certainly contributed to this recession and all the things we
are struggling with now and it seems like it is really hard to
get to and think about what CFTC has done and so on. The CFTC,
as you well know, Mr. Chairman, didn't cause the problem. They
have done their job. And we know that and it is just a point.
And as we have learned recently on other issues--and I am
rambling here little bit so if it is okay, then I will stop and
I will be full stop.
The Chairman. All right.
Mr. Boswell. Thank you.
You know, if we don't give the tools to do the job, for
example, to the IRS and if this fiscal cliff thing happens,
they don't have the capacity to deal with their responsibility.
Well, I see the same thing with you folks that have the CFTC
responsibility, whether we like Dodd-Frank or we don't like it,
we have done it. If we have the will or the desire to change
it, well, maybe that will happen, but meanwhile, we have
charged the CFTC with a lot of responsibility, which we should.
But they got to have the tools.
And I know when I came back, Steve, from all those years
gone in the army and I had to learn how to take care of
machinery again, I didn't have the right toolboxes. And here I
am stuck with a massive 750 out there and a bearing going out
and I don't have the things in my toolbox to deal with it. But
when I did, I could. And maybe that is an oversimplification,
but we have to give them the tools. We have said this is your
responsibility.
You know, Mr. Chairman, you and I have talked about this
and we have not exactly agreed on everything, but that is part
of the process, which we both respect very much and it is what
makes our country great. You got to have the wherewithal to do
what we have asked you to do. I think you have done pretty darn
good considering the things you have accomplished. So my
caution, I guess, or my counsel or whatever you want to call
this as I depart this responsibility is, a lot weighs on the
welfare of the country to do this right, to have daylight is a
term I learned to use, to have daylight on stuff so they know
what is going on. And if we know what is going on, we got the
possibility of doing what we need to do, which might include
leave it alone and or do something that needs to be done to
keep our country on its path.
So I would just leave this thought with you. If we are
going to change it, well, then, change it. If we can't, let us
at least give the Commission the tools they need, the hardware,
and the people to do the job we have said you have to do and
not just be critical of it when they can't get it done because
they don't have the tools.
And with that, I just want to say to David, thank you for
responding when this hearing was coming up. You know, I am
going out the door and I know that and I did want to come and
participate, but I thought it better for the continuity and
going on if you or somebody would step up, and you have, and I
thank you for it.
And Mr. Conaway, I just appreciate you and your sincerity
about what you do and expertise that you bring with your vast
experience in accounting and so on. And since I did a little
thing called rough-necking down in your part of the country
when I was a youngster, I have a lot of respect for West Texas.
You know, I was on a standard rig--I probably told you one
time--when the oil came in. Wow. What an experience. But
anyway, so much for that. That is too much reminiscing but I
wish you well.
The Chairman. Thank you.
Mr. Boswell. I thank you for the opportunity to have a
moment, and I will try not to interfere anymore, but if I have
to, I will.
But thank you.
The Chairman. Thank you. Mr. Boswell yields back.
Mr. Chilton, 5 minutes.
STATEMENT OF HON. BART CHILTON, COMMISSIONER,
COMMODITY FUTURES TRADING COMMISSION,
WASHINGTON, D.C.
Mr. Chilton. Thank you, Mr. Chairman. It is a pleasure to
be with you. Thank you, Members of the Subcommittee, and
particularly thank you, Chairman Boswell, for all your service.
It has been an honor and personal privilege to work with you,
sir.
And I am also pleased to testify with my fellow regulator,
Commissioner Sommers. We did so last year. And as you know, she
heads our Global Markets Advisory Committee and does a superb
job. And I thank her for all her counsel and assistance over
the years.
And as Chairman Boswell was talking, it reminded me of that
movie around this time of year, It's a Wonderful Life. Do you
remember that circumstance where Uncle Billy loses the money
and George says to him, ``Where is that money you stupid,
silly, old fool? Where is that money? Do you realize what this
means? It means bankruptcy and scandal and prison. That is what
it means. One of us is going to jail and it is not going to be
me.''
And the reason I raise that is that back in 2008--and I get
this question asked all the time and perhaps you do back in
your districts--how come nobody went to jail for what happened
in 2008 for tanking the economy? Well, part of the reason is
there wasn't a law against what they did, what was done to the
economy. That is why Dodd-Frank is important. I think it is a
good law.
But as many Members, including Chairman Conaway has pointed
out, if we don't implement it correctly, it could be bad. We
have to do this right. We have to have a balanced approach. And
that is particularly important with regard to cross-border
issues, because as you all know and have spoken to us about in
no uncertain terms, these markets are correlated. They are
impacted globally. So we have to make sure that what we do
doesn't put our U.S. firms at a competitive disadvantage, but
we do want, ultimately, harmonized global regulations to the
extent that it is practical.
So with regard to that, if you go back to when Dodd-Frank
was passed in 2010, at that point, it looked like other
nations, and particularly the European Union, were maybe 2
years behind implementing their financial reforms--2 years. So
there is a big concern about regulatory arbitrage. What if the
U.S. went first and did the things by the dates we required,
July of 2011? But it turns out since we have taken our time--as
Chairman Conaway has written to us many times, take your time,
go slow, get it right--we have listened to you. You have been
correct, sir. So we have slowed down. We have about \2/3\ our
regs done so far but we are still trudging along. But in that
delay, now there is not that big 2 year difference anymore. Now
there is only maybe 5, 6 months difference between us and the
EU. Some of the other nations are little bit behind that.
So the thought that seems to make sense to me--and I am
pleased that Commissioner Sommers and I are of a fairly like
mind on this--is that let us sort of jump into the pool at the
same time. Let us perhaps delay compliance for 6 months with
some of these things in order that we can all do this at the
same time. There is no regulatory arbitrage, and we don't
negatively impact our companies, our U.S. financial firms. So I
am not suggesting that that delay, Mr. Chairman, will make it
like a super great wonderful life for financial firms, but it
will definitely improve things.
And one final note, I have given to the clerk some sheets
that I have unrelated to this issue of cross-border, I know you
guys are dealing with the farm bill, but we do have a
reauthorization coming up next year and there are some issues
that are critical. I have just provided one page for you. If
you can take them and maybe we can talk about them next year,
but they have to do with a need for an insurance fund in the
derivatives sector because now derivatives customers are
treated as second-class citizens compared to the securities
side; second, the need to increase our penalty regime. We have
these antiquated penalties where we only charge very little;
and third, dealing with high-frequency traders, these traders I
call cheetah traders, no mention of them in Dodd-Frank because
they weren't seen as a problem. The Flash Crash of 2010
happened just a couple of months before the bill. So to the
extent you want to engage in that, I am happy to talk about it
whenever.
And I do thank you for the opportunity to be here, Mr.
Chairman.
[The prepared statement of Mr. Chilton follows:]
Prepared Statement of Hon. Bart Chilton, Commissioner, Commodity
Futures Trading Commission, Washington, D.C.
Good morning, Chairman Conaway, Ranking Member Boswell, and Members
of the Subcommittee. Thank you for the opportunity to be with you today
regarding the harmonization of global derivatives market regulatory
reform. The Subcommittee's oversight of the CFTC is critical to the
work we do and I appreciate your attention to this and other matters.
It is a pleasure, as it was last year, to testify alongside
Commissioner Sommers, the Chair of our global Markets Advisory
Committee (GMAC). She does a superb job.
Today, I'm pleased to discuss the progress we've made, as well as
some of the challenges we've encountered in implementing the Wall
Street Reform and Consumer Protection Act of 2010--otherwise known as
Dodd-Frank. We are always guided by the law and in this case we also
have been considering the 2009 Pittsburgh G20 Communique (reaffirmed
this year at the G20 Mexico summit), which set forth key directives for
December 2012 implementation of clearing, trading, reporting, and
prudential rules for G20 member countries. The recent statement issued
by international financial regulators is a welcome signal that we've
made significant progress in this area.
Dodd-Frank is a good and needed law. While it is our law--a U.S.
law--these are global, interrelated financial markets and financial
firms. They are connected and correlated and rules and regulations need
to be attentive to that fact. Dodd-Frank can, if we implement it
correctly, avoid systemic risk to our economy and make markets more
efficient and effective and devoid of fraud, abuse and manipulation.
But, I said ``if'' we implement it correctly.
We've known since passage of Dodd-Frank that, unless we strike the
right balance and provide appropriate guidance and relief on cross-
border issues, we risk significant market disruption and migration, as
well as regulatory arbitrage, due to an imbalance in global regulatory
scope and content. As Chairman Conaway cautioned in an August letter,
``Absent consistent regulatory standards proposed by our own domestic
regulators, effective coordination between the U.S. and foreign
regulators would seem virtually impossible.'' With the leadership of
our Chairman and Commissioner Sommers, we have engaged in an
international dialogue to move forward on a balanced approach to these
regulations.
In that regard, the entire regulatory process has taken longer than
Dodd-Frank deadlines. Most regulations were to be completed by July of
2011. The European Union appeared perhaps 2 years behind the U.S. at
the time of Dodd-Frank's passage. It appeared that if the U.S. went
first, and by 2 years so, the impact could create havoc for markets and
market participants. Since the law passed, there have been those
(including some on this Subcommittee) who have urged regulators to go
slow. Particularly as to the impact of the new law on the international
front, they were right. The regulatory reform rulemaking process has
shown us that we needed much more information about the over-the-
counter (OTC) space in order to promulgate appropriate and reasonable
rules. We've proposed and re-proposed and extended comment periods and
amended our rules, provided comprehensive guidance, and where needed,
appropriate relief. It has not always been a graceful exercise, but by
and large, I believe we have gotten things right. If we haven't, we'll
hear about it. And we've shown that we can be flexible in
implementation content and timing. The result is that during these
delays, the rest of the world, and particularly the European Union, has
caught up to us. It now appears that EU regulations will be implemented
in a matter of months after U.S. rules may be finalized, as opposed to
the 2 years originally envisioned.
In June, we proposed interpretive guidance and exemptive relief on
extraterritoriality issues. We are now poised to provide final guidance
in this area, to give clarity as to the application of Dodd-Frank on
those operating outside our territorial borders. We need to ensure that
we strike that correct balance in carrying out the mandates of the law,
and at the same time confirm that appropriate substituted compliance is
available to market participants.
Given that global financial reform regulations can be completed on
a more similar time horizon, it's clear to me that we need to provide
for phased-in compliance and appropriate relief from rules for an
interim period--perhaps 5 or 6 months. We do not want to repeat the
process we--and the markets--underwent in October. In that instance,
market participants were unclear what things would truly be required on
the October 12th compliance date. We ended up working it all out, but
it should have, and could have, been done in a more open and
streamlined fashion. We need to avoid that now as we approach January
1, 2013 implementation of certain rules and regulations. This would
give markets and participants time to comply with the new regulatory
environment and also would provide assurance to global markets and
regulators that we are not causing unnecessary market disruptions. I've
made specific recommendations which are:
1. Extend the narrower, territorial definition of U.S. Person used
in the CFTC's October 2012 staff no-action letter.
2. U.S. and foreign SD and MSP registrants would have interim
relief from compliance with external business conduct
standards, and during the interim period, should operate under
a ``good faith'' compliance standard.
3. Allow non-U.S. dealers to not register when facing registered
U.S. swaps dealers. (i.e., their obligation to register would
be based on swaps with U.S. end-users. This is intended to
reduce the incentive for non-U.S. G20 dealers to conduct their
swaps with foreign branches and affiliates of U.S. SDs and MSPs
as opposed to trading with regulated U.S. SDs and MSPs.)
4. Provide relief as to the swaps dealing aggregation standard
(i.e., swap dealing counting toward the de minimis level would
happen on an individual entity, not enterprise level).
These seem to be common-sense measures that can be taken which
would ease the transition to compliance, and reduce incentives for
regulatory arbitrage, or a race to the thinnest rule book.
Finally, we need to immediately respond to those who have requested
relief from the Agency. I'm not suggesting we will grant exemptions,
but at the least we need to respond . . . and now. Furthermore, in the
limited meantime prior to requiring compliance, it would not be
appropriate, reasonable, or responsible for the Commission to proceed
against entities for non-compliance with Dodd-Frank rules unless and
until they have received a response from the Agency to an existing
request. And, importantly, I cannot envision the Commission moving
forward with such an action.
Separate from these issues of international harmonization, I look
forward to working with the Subcommittee on the CFTC reauthorization
this next year. In that regard, I believe we should do at least three
things: First, increase penalties for those that violate our financial
laws; second, create a futures insurance fund; and third, we need to
develop a meaningful oversight regime for high frequency traders. I
have a one-pager on each of these matters for Members and I will leave
it to the Chairman if these three pages should be included in the
hearing record.
Thank you for the opportunity to present this testimony today.
The Chairman. Thank you, Mr. Chilton.
Ms. Sommers?
STATEMENT OF HON. JILL E. SOMMERS, COMMISSIONER, COMMODITIES
FUTURES TRADING COMMISSION,
WASHINGTON, D.C.
Ms. Sommers. Good morning, Chairman Conaway, Ranking Member
Boswell, and Members of the Committee. Thank you for inviting
me to testify today. It is a pleasure to be here with my
colleagues to speak about the challenges facing U.S. and
international markets resulting from the Dodd-Frank derivatives
reforms.
I have worked in the derivatives industry for over 15 years
and have been a Commissioner at the CFTC since August of 2007.
During my time at the Commission, I have served as Chairman and
sponsor of the CFTC's Global Markets Advisory Committee and
have represented the Commission at meetings of the
International Organization of Securities Commissions. I am
pleased to give you my perspective on the enormous challenges
facing regulators across the globe in their quest to meet the
commitments on OTC derivatives reform made by the G20 leaders
in 2009, and in particular, the challenges for U.S. regulators
in interpreting the cross-border scope of Dodd-Frank.
In May of 2011, Commissioner Chilton and I testified in
front of this Subcommittee regarding the harmonization of
global derivatives reform and its impact on U.S.
competitiveness and market stability. At that time, I discussed
three concerns: first, there were substantive differences
between derivatives reform in the U.S. and in other
jurisdictions; second, other jurisdictions were not as far
along in their reform process, which could harm the global
competitiveness of U.S. businesses due to regulatory arbitrage;
and third, our failure to clarify how our rules would apply
internationally was creating a great deal of uncertainty, both
in the U.S. and abroad.
Although my concerns today remain the same, since then, I
have had the benefit of significant dialogue and feedback from
foreign regulators and market participants regarding the cross-
border proposal the CFTC released in June. I have two specific
solutions: first, the Commission should not act outside the
jurisdictional limits that were set for us by Congress. Section
722(d) of the Dodd-Frank Act, which added Section 2(i) to the
Commodity Exchange Act, provides that the Act ``shall not apply
to activities outside the United States unless those activities
have a direct and significant connection with activities in, or
affect on, commerce of the United States, or contravene rules
or regulations prescribed by the Commission designed to prevent
evasion.''
In my view, those words direct and significant should be
read together. It should not be enough that a swap transaction
involves a U.S. counterparty. Rather, the connection to the
United States must be direct and significant. I do not believe
that every single swap a U.S. person enters into, no matter
what the swap or where it is transacted, has a direct and
significant connection with activities in, or effect on,
commerce of the United States.
Second, it is imperative for U.S. regulators to harmonize
their approach with global regulators on the extraterritorial
reach of Dodd-Frank. While we have been consulting regularly
with the SEC and other regulators, our approaches are far from
consistent. It does no good to coordinate with our fellow
regulators if we are not going to listen to them or incorporate
their suggestions. The Commission has worked for decades to
establish relationships with our foreign counterparts built on
respect, trust, and information sharing, which has resulted in
a successful history of mutual recognition of foreign
regulatory regimes in the futures and options markets spanning
over 20 years.
At the Pittsburgh Summit in 2009, all G20 nations agreed to
a comprehensive set of principles for regulating the OTC
derivatives markets. We should rely on their regional expertise
and try to the best of our ability to avoid overlapping rules
or dual regulations. While the pace of implementing reforms
among the various jurisdictions has been uneven, I have no
reason to believe that comparable or equivalent regulation is
unachievable. It is obvious that more time is needed to
facilitate an orderly transition to a regulated environment.
This task is not going to be easy and we have a long way to go,
but we must continue to work with our colleagues both
domestically and internationally to coordinate our approaches
to regulation of the global swaps market. Global coordination
is key to successfully regulating these global markets. In
order to accomplish harmonization with the rest of the world
both in substance and timing, my hope is that in the coming
days the Commission will issue clear and concise relief from
having to comply with various Dodd-Frank requirements for both
domestic and foreign swap entities. These are very complex
issues but we should not make cross-border guidance more
confusing than necessary.
I am grateful for the opportunity to be able to discuss
these important issues and happy to answer any questions.
[The prepared statement of Ms. Sommers follows:]
Prepared Statement of Hon. Jill E. Sommers, Commissioner, Commodity
Futures Trading Commission, Washington, D.C.
Good morning, Chairman Conaway, Ranking Member Boswell, and Members
of the Committee. Thank you for inviting me to testify on the
challenges facing U.S. and international markets resulting from the
Dodd-Frank derivatives reforms. I have worked in the derivatives
industry for over fifteen years and have been a Commissioner at the
Commodity Futures Trading Commission (CFTC or Commission) since August
of 2007. During my time at the Commission I have served as the Chairman
and sponsor of the CFTC's Global Markets Advisory Committee (GMAC) and
have represented the Commission at meetings of the International
Organization of Securities Commissions (IOSCO), one of the principal
organizations formed to develop, implement and promote internationally
recognized and consistent standards of regulation, oversight and
enforcement in the securities and derivatives markets. I am pleased to
give you my perspective on the many challenges facing regulators across
the globe in their quest to meet the commitments on over-the-counter
(OTC) derivatives reform made by the G20 Leaders in 2009 and, in
particular, the challenges presented in interpreting the cross-border
scope of Dodd-Frank. The views I present today are my own and not those
of the Commission.
Section 722(d) of the Dodd-Frank Act, which added Section 2(i) to
the Commodity Exchange Act, provides that the Act shall not apply to
activities outside the United States unless those activities have a
direct and significant connection with activities in, or effect on,
commerce of the United States, or contravene rules or regulations
prescribed by the Commission designed to prevent evasion. In 2011 the
Commission acknowledged the growing uncertainty surrounding the
extraterritorial reach of Dodd-Frank and in August of that year held a
2 day roundtable, followed by a public comment period. In July 2012 the
Commission published proposed guidance setting forth an interpretation
of how it might construe Section 2(i), followed by another round of
public comment. The guidance included a proposed definition of ``U.S.
person,'' the types and levels of activities that would require foreign
entities to register as U.S. swap dealers or major swap participants
(swap entities), and the areas in which such swap entities might be
required to comply with U.S. law and those in which the Commission
might recognize substituted compliance with the law of an entity's home
jurisdiction.
On November 7, 2012 I convened a meeting of the GMAC to further
discuss the Commission's proposed interpretive guidance and to identify
questions and areas of concern in implementing the CFTC's proposed
approach. A number of foreign jurisdictions were represented, including
regulators from Australia, the European Commission, the European
Securities and Markets Authority, Hong Kong, Japan, Quebec and
Singapore. Representatives of the U.S. Securities and Exchange
Commission (SEC) also attended to discuss the SEC's perspective. A
common theme that emerged was concern over the breadth of CFTC's
proposed definition of ``U.S. person,'' the implications of having to
register in the U.S., the uncertainty of the Commission's proposal on
substituted compliance, and the need to identify areas where complying
with a particular U.S. requirement might conflict with the law of a
foreign swap entity's home country regime.
On November 28, 2012 regulatory leaders from Australia, Brazil, the
European Union, Hong Kong, Japan, Ontario, Quebec, Singapore,
Switzerland and the United States met in New York to continue the
dialogue. In a press statement issued after the meeting the leaders
supported the adoption and enforcement of robust and consistent
standards in and across jurisdictions, and recognized the importance of
fostering a level playing field for market participants, intermediaries
and infrastructures, while furthering the G20 commitments to mitigating
risk and improving transparency. The leaders identified five areas for
further exploration, including:
the need to consult with each other prior to making final
determinations regarding which products will be subject to a
mandatory clearing requirement and to consider whether the same
products should be subject to the same requirements in each
jurisdiction, taking into consideration the characteristics of
each domestic market and legal regime;
the need for robust supervisory and cooperative enforcement
arrangements to facilitate effective supervision and oversight
of cross-border market participants, using IOSCO standards as a
guide;
the need for reasonable, time-limited transition periods for
entities in jurisdictions that are implementing comparable
regulatory regimes that have not yet been finalized and to
establish clear requirements on the cross-border applicability
of regulations;
the need to prevent the application of conflicting rules and
to minimize the application of inconsistent and duplicative
rules by considering, among other things, recognition or
substituted compliance with foreign regulatory regimes where
appropriate; and
the continued development of international standards by
IOSCO and other standard setting bodies.
The authorities agreed to meet again in early 2013 to inform each
other on the progress made in finalizing reforms in their respective
jurisdictions and to consult on possible transition periods. Future
meetings will explore options for addressing identified conflicts,
inconsistencies, and duplicative rules and ways in which comparability
assessments and appropriate cross-border supervisory and enforcement
arrangements may be made.
The Commission has worked for decades to establish relationships
with our foreign counterparts, built on respect, trust, and information
sharing, which has resulted in a successful history of mutual
recognition of foreign regulatory regimes in the futures and options
markets spanning 20+ years. At the Pittsburgh summit in 2009 all G20
nations agreed to a comprehensive set of principles for regulating the
OTC derivatives markets. We should rely on their regional expertise.
While the pace of implementing reforms among the various jurisdictions
has been uneven, I have no reason to believe that comparable or
equivalent regulation is unachievable. It is obvious that more time is
needed to facilitate an orderly transition to a regulated environment.
It is important that assessments of comparability be made at a high
level, keeping in mind the core policy objectives of the G20
commitments rather than a line-by-line comparison of rule books. It is
also important to avoid creating an unlevel playing field for U.S.
firms just because the U.S. is ahead of the rest of the world in
finalizing reforms. U.S. firms should not be disadvantaged by tight
compliance deadlines set by the CFTC. Global coordination is key. It is
my hope that in the coming days the Commission will issue clear and
concise relief from having to comply with various Dodd-Frank
requirements, for both domestic and foreign swap entities, until we
have a better sense of the direction in which we are all headed.
I am grateful for the opportunity to speak about these important
issues and am happy to answer any questions.
The Chairman. Right, thank you, Ms. Sommers.
I need unanimous consent to insert this statement in the
record just ahead of Mr. Kono's testimony. Mr. Kono is
recognized as a representative of a foreign organization whose
statements are being provided under the terms of diplomatic
immunity given to the officials of the Government of Japan. The
statements are being given in cooperation and freely for the
information of the U.S. House of Representatives and the House
Committee on Agriculture.
So thank you, Mr. Kono.
Mr. Kono, 5 minutes?
STATEMENT OF MASAMICHI KONO, VICE COMMISSIONER FOR
INTERNATIONAL AFFAIRS, FINANCIAL SERVICES AGENCY OF JAPAN;
CHAIRMAN OF THE BOARD, INTERNATIONAL
ORGANIZATION OF SECURITIES COMMISSIONS, TOKYO, JAPAN
Mr. Kono. Thank you, Mr. Chairman.
Mr. Chairman and Members of the Committee, it is my great
honor and pleasure to be here today to speak to you about
issues concerning cross-border regulation of OTC derivatives
markets. My name is Masamichi Kono representing the Financial
Services Agency of Japan. I am also currently the Chairman of
the Board of IOSCO, the International Organization of
Securities Commissions. But I must mention that any views I
express today are not necessarily the views of the
organizations that I represent.
You will recall that G20 leaders agreed at the Pittsburgh
Summit in September 2009 on the basic elements of reform and
OTC derivatives markets, and a number of jurisdictions,
including U.S. and Japan, have been making significant progress
in implementing the G20 commitments towards the agreed deadline
of the end of 2012. Actually, the regulations which Japan has
already implemented from November this year, not exactly
identical to U.S. regulations, but are fully consistent with
the objectives of the G20 commitments to improve transparency
in the derivatives markets, mitigate systemic risk, and protect
against market abuse. In this respect, our laws and
regulations, which we have implemented from November of this
year, share the same goals as the Dodd-Frank Act.
One important issue that has surfaced lately, as having
been mentioned by previous speakers, is how to deal properly
with the risks of cross-border activities and transactions in
OTC derivatives, which is very much a globalized market. One
point that I would wish to make today is that such risks need
not be addressed by extraterritorial application of U.S. laws
and regulations. Rather, the U.S. authorities could rely on
foreign regulators upon establishing, of course, that the
foreign regulators have the required authority and competence
to exercise appropriate regulation and oversight over those
entities and activities. This is what we consider as the most
efficient and effective approach in line with the principles of
international comity between sovereign jurisdictions.
Such reliance on foreign regulators ensures that there is
no conflict or overlap of applicable rules to entities
operating cross-border and to transactions that take place
across borders. It not only enables an efficient and effective
use of our limited supervisory resources, but also, even more
importantly, it removes legal uncertainty and significantly
reduces the compliance costs of market participants and
infrastructure operators in all jurisdictions. This will
ultimately lead to significant cost savings for the investor
and for the taxpayer as well, and actually in some cases,
certain activities or transactions could be prevented from
taking place because of conflicting regulations by different
jurisdictions, and this can be avoided through enhanced
coordination and cooperation between regulators.
Thus, there are now growing calls internationally for
taking the required steps to avoid conflicting or overlapping
regulation and for demonstrating much greater coordination and
cooperation among regulators. And regulators around the world
will have to respond to those calls. Actually, it is very much
in this spirit that a group of regulators, including ourselves,
issued on December 4 a joint press statement entitled,
Operating Principles and Areas of Exploration in the Regulation
of the Cross-Border Derivatives Market.
Now, in recent months, foreign regulators have expressed
their concerns with regard to the CFTC's proposed reforms,
primarily because they find potential conflicts or overlaps
with our own rules that are or will be implemented soon. In
this regard, we of course appreciate very much the ongoing
efforts by the CFTC in addressing those issues raised by
foreign regulators, but much needs to be done.
Now, I might not have the time to go through each and every
subject, but let me try very briefly. First, it is important
that the details of the applicable laws and regulations are
made clear as much as possible before their implementation in
order to minimize regulatory uncertainty. Second, once the
details are made available, regulators should work together to
avoid outright conflicts and minimize overlaps as much as
possible, ideally again before the rules are applied in their
jurisdictions. Third, a sufficient transition period and
adequate relief measures for foreign entities and
infrastructure operators are needed. Fourth, when adopting an
approach of reliance on foreign regulators, it should be based
on a clear recognition of the foreign regulators' primary
authority and competence.
And in the U.S., our view is that the scope of application
of substituted compliance can be further extended to a broader
set of regulated entities and transaction requirements. And of
course as a national regulator, we would like to be recognized
as a primary regulator of the entities established in Japan.
Fifth, cross-border transactions by their very nature will
be subject to regulations of two or more jurisdictions so we
need arrangements across different jurisdictions to avoid
duplication. And in Japan, we have taken steps to refrain from
applying our rules to cross-border transactions in anticipation
of an international coordination arrangement at the outset of
our implementation.
Now, as I mentioned, we have made some efforts in recent
days. We look forward to continuing to work with our
counterparts in other jurisdictions to achieve this goal, and
certainly, we would like to do our best to minimize the cost to
the economy that has been referred to earlier.
So thank you very much for providing this opportunity to
share my views with you today, and let me emphasize again that
we are very much intending to cooperate and coordinate with
each other as much as possible in the coming days and weeks. It
is a huge challenge but one that has to be pursued if we are to
have globally interconnected financial markets that serve well
to help those in the real economies worldwide.
Thank you very much.
[The prepared statement of Mr. Kono follows:]
Prepared Statement of Masamichi Kono, Vice Commissioner for
International Affairs, Financial Services Agency of Japan; Chairman of
the Board, International Organization of Securities Commissions, Tokyo,
Japan
Introduction
Mr. Chairman and Members of the Subcommittee on General Farm
Commodities and Risk Management. It is my great honor and pleasure to
be invited to today's hearing to speak to you about issues concerning
cross-border regulation of OTC derivatives markets. My name is
Masamichi Kono, Vice Commissioner for International Affairs at the
Financial Services Agency of Japan. In my capacity, I represent my
Agency in various international organizations of financial regulators
and supervisors. I am also currently the Chairman of the Board of
IOSCO, i.e., the International Organization of Securities Commissions.
I must mention that any views I express today are not necessarily
identical to the official views of the organizations that I represent.
In response to the financial crisis that started in 2007-2008, G20
Leaders agreed at the Pittsburgh Summit in September 2009 that all
standardized OTC derivative contracts should be traded on exchanges or
electronic trading platforms, where appropriate, and cleared through
central counterparties by end-2012 at the latest, and OTC derivative
contracts should be reported to trade repositories.
A number of jurisdictions, including Japan and the United States,
have been making significant progress in implementing the G20
commitments in an internationally consistent and coordinated manner
towards the agreed deadline of end-2012. The regulations which Japan
implemented from November this year are not identical to the U.S.
regulations, but are fully consistent with the objectives of the G20
commitments to improve transparency in the derivatives markets,
mitigate systemic risk and protect against market abuse. In this
respect, our laws and regulations which we have implemented from
November this year share the same goals as the Dodd-Frank Act.
As to the cross-border application of national laws to OTC
derivatives, we can understand the CFTC's concern that risks emanating
from an overseas commercial presence of a U.S. financial group could
directly flow back to the U.S. and cause significant systemic
disruptions, and this should be avoided. The same would apply if a non-
U.S. financial group had significant commercial presence in U.S.
territory. We believe, however, that such risks need not be addressed
by extraterritorial application of U.S. laws and regulations.
If the overseas commercial presence of the U.S. financial group or
the non-U.S. financial group is appropriately regulated by foreign
regulators, the U.S. authorities could rely on the foreign regulators
upon establishing that the foreign regulators have the required
authority and competence to exercise appropriate regulation and
oversight over those entities and activities abroad. This is what we
consider as proper treatment in line with the principles of
international comity between sovereign jurisdictions.
Such reliance on foreign regulators ensures that there is no
conflict or overlap of applicable rules to entities operating cross-
border, and to transactions that take place across borders. It not only
enables an efficient and effective use of the limited supervisory
resources of the regulator, but also, even more importantly, removes
legal uncertainty and significantly reduces the compliance costs of
market participants and infrastructure operators in all jurisdictions.
This will ultimately lead to significant cost-savings for the investor,
and for the taxpayer. In some cases, certain activities or transactions
could be prevented from taking place because of conflicting regulation,
and this can be avoided through enhanced coordination and cooperation
between regulators. Needless to say, such reliance can only be possible
when mutual trust is established between regulators, and appropriate
supervisory arrangements exist between them.
In recognition of the above, there are now growing calls
internationally for taking steps to avoid conflicting or overlapping
regulation, and for demonstrating much greater coordination and
cooperation among regulators. Regulators around the world will have to
respond to those calls. It is very much in this spirit that a group of
regulators including ourselves issued on December 4 a joint press
statement entitled ``Operating Principles and Areas of Exploration in
the Regulation of the Cross-border OTC Derivatives Market''. I will
come back to explain the background of this important press statement
later.
OTC Derivatives Market Reforms in Japan
Since September 2009, Japan has exerted its utmost efforts to put
in place legislative and regulatory measures to reform the OTC
derivatives markets, for the purpose of fulfilling the G20 commitments.
Our Financial Instruments and Exchange Act (FIEA) has been amended in
two stages.
The first stage of legislation dates back to May 2010, when
mandatory clearing requirements and requirements to report transactions
to trade repositories were introduced. Those amendments took effect
from 1 November this year, with phase-in arrangements for product
designation and reporting requirements.
As to the second stage, our Diet passed this September legislation
introducing requirements for usage of electronic trading platform (ETP)
and for enhancing price transparency. In consideration of the need to
provide sufficient time for preparation on the part of market
participants, and to address the potential impact on market liquidity
that those measures could have, the implementation of this second stage
of legislation will be phased in for a period of up to 3 years.
With respect to the mandatory clearing requirement that entered
into force last month, only Japanese index-based CDSs (i.e., the iTraxx
Japan Index Series) and plain-vanilla Japanese Yen-denominated Interest
Rate Swaps (IRS) with reference to LIBOR are subject to mandatory
clearing. The scope of products subject to mandatory clearing will be
expanded to the products, such as JPY-denominated IRSs with reference
to TIBOR, foreign currency (USD and EURO) denominated IRSs, and single-
name CDSs referencing Japanese companies, taking into consideration
such factors as the volume of transactions and the degree of
standardization.
Also, at the outset, the application of mandatory central clearing
requirements is limited to transactions between large domestic
financial institutions registered under the FIEA, who are members of
licensed clearing organizations. In this regard, it should be noted
that currently in Japan there is only one licensed CCP under the
amended FIEA. Foreign CCPs are invited to be licensed in Japan, with
less onerous requirements applicable in light of their foreign status.
Going forward, the clearing requirements could be expanded to
transactions between the above financial institutions and foreign
financial institutions (not registered under FIEA), taking into account
international coordination efforts currently underway on cross-border
regulation.
On reporting requirements, financial institutions registered under
the FIEA are required to report their OTC derivatives transactions to
trade repositories (TRs) for products such as (i) credit derivatives,
and (ii) forward, option and swap transactions in relation to interest
rates, foreign exchanges, and equities.
Need To Avoid Conflicting Or Overlapping Cross-Border Regulations
In recent months, foreign regulators have expressed their concerns
with regard to the CFTC's proposed reforms primarily because they find
potential conflicts or overlaps with their own rules that are or will
be implemented soon. Certainly the concerns described below are
particularly relevant with regard to U.S. regulations, but it should be
noted that many of them are, by nature, pertinent to any set of
national or regional rules applied to entities operating cross-border
and to cross-border transactions. In this regard, we appreciate very
much the ongoing efforts by the CFTC in dealing with those issues
raised by foreign regulators.
First, it is important that the details of the applicable laws and
regulations are made clear as much as possible before their
implementation, in order to minimize regulatory uncertainty.
Regarding the need for this transparency up front, more clarity on
the detailed elements of the applicable rules is urgently requested in
the case of the U.S. The examples of such elements are: the definition
of a U.S. person, the terms and conditions for applying substituted
compliance to foreign entities and cross-border transactions, and the
method to be employed for aggregating transaction volumes of group
firms worldwide in relation to the de minimis threshold for
registration of swap dealers.
Second, once the details are made available, regulators should work
together to avoid outright conflicts and minimize overlaps as much as
possible, ideally before the rules are applied in their jurisdictions.
Reliance on foreign regulators can be arranged through approaches of
mutual recognition, substituted compliance, and exemptions, or a
combination of those approaches.
Starting the implementation of U.S. regulations under the current
circumstances has already created uncertainty in the markets. If not
managed properly, significant reductions in market liquidity and/or
shifts in transaction venues or counterparties could occur as a result.
Third, a sufficient transition period and adequate relief measures
for non-U.S. entities and infrastructure operators are needed to
address the difficulties that they face in complying with U.S.
regulations. A certain amount of time is also required to work to avoid
regulatory conflicts and inconsistencies arising from differences in
the content and the timing of implementation of national or regional
regulations. Foreign market participants and regulators would require
some additional time to fully prepare for the new U.S. requirements. In
Japan, as described above, we are taking a two-stage approach in
introducing new rules, and providing sufficient time for their phased
implementation.
Fourth, when adopting an approach of reliance on foreign
regulators, it should be based on a clear recognition of the foreign
regulators' primary authority and competence in exercising effective
regulation of entities and infrastructures based in its jurisdiction.
In the U.S., to the extent that the CFTC's proposed regulations
have revealed, the scope of application of substituted compliance can
be further extended to a broader set of regulated entities and
transaction-level requirements. As a national regulator, we would like
to be recognized as the primary regulator of the entities established
in Japan, and the CFTC is invited to rely on our supervisory authority
and competence as much as possible. Whether a swap dealer qualifies for
substituted compliance should be determined on recognition of
equivalent regulation on a country-by-country basis, not on an entity-
by-entity or rule-by-rule basis. In Japan, with respect to foreign CCPs
and trade repositories, they are subject to less onerous requirements
compared to CCPs and trade repositories established in Japan, if they
are properly supervised by foreign regulators under supervisory
cooperation arrangements with FSA Japan.
Fifth, cross-border transactions, by their nature, will be subject
to regulations of two or more jurisdictions, if no arrangements are
made between the relevant regulators to avoid duplication. If those
duplicative requirements are not entirely conflicting or inconsistent,
market participants could still cope, although there may still be
additional costs involved in ensuring compliance with several different
rules, such as in the case of duplicative data reporting requirements.
But, if those rules clash with each other, arrangements are needed
between regulators to enable the transaction to take place legally.
Such cases can arise in the context of central clearing requirements.
In Japan, we have so far deliberately refrained from applying our
rules to cross-border transactions in anticipation of an international
coordination arrangement on regulation of cross-border transactions
which we strongly hope to be developed soon.
When the U.S. and Japan require central clearing for transactions
of the same product, such as JPY-denominated IRSs with reference to
LIBOR, market participants will not be able to enter into transactions
without breaching the regulations of either the U.S. or Japan, unless
there is a CCP licensed or registered both in the U.S. and Japan In
this regard, a Japanese clearing organization licensed under FIEA
(Japan Securities Clearing Corporation (JSCC)) is currently seeking
CFTC registration as a derivatives clearing organization (DCO). The
challenge for JSCC, however, is that it would need more time than its
U.S. counterparts to fully comply with U.S. regulation, and a request
is being made to grant some additional time for it to be fully
compliant.
Need for Better International Coordination and the Initiatives Underway
As noted above, there are a number of important issues we need to
address with respect to cross-border application of OTC derivatives
regulations. To address these issues, there is a much greater need for
international coordination and cooperation among regulators.
The G20 Ministers of Finance and Central Bank Governors agreed in
Mexico City this November to put in place the legislation and
regulation for OTC derivatives reforms promptly and act by end-2012 to
identify and address conflicts, inconsistencies and gaps in their
respective national frameworks, including in the cross-border
application of rules. The Financial Stability Board, in its latest
report on OTC derivatives market reforms, urged key, high-level OTC
derivatives market regulators from G20 jurisdictions to pursue further
discussions before the end-2012 deadline to (i) identify the cross-
border application of rules to infrastructure, market participants, and
products; (ii) identify concrete examples of any overlaps,
inconsistencies and conflicts; and (iii) develop options for addressing
these issues.
In response to the growing calls, leaders of regulators of major
OTC derivatives jurisdictions, including regulators from the U.S., EU
and Japan, met in New York City at the end of November, and agreed to a
set of high-level operating principles and identified areas for further
exploration in the regulation of the cross-border OTC derivatives
market. This effort culminated in the joint press statement published
last week which I referred to earlier. In pursuing this work, we have
appreciated very much the leadership taken by the CFTC and the SEC.
Regulators have agreed to regularly meet and consult with one another,
going forward. The next meeting is scheduled to be in Brussels early
next year.
The joint press statement was intended to address important issues
requiring international coordination and cooperation, and to present a
useful way forward. This includes (i) an understanding on clearing
determinations (prior-consultation when making clearing
determinations), (ii) an understanding on sharing of information and
supervisory and enforcement cooperation (relevant supervisory
authorities enter into supervisory and enforcement cooperation
arrangements), (iii) an understanding on timing (an orderly
implementation process and a reasonable limited transition period) and
(iv) areas of exploration regarding the scope of regulation and
recognition or substituted compliance for cross-border compliance
(possible approaches to prevent the application of conflicting rules
and the desire to minimize the application of inconsistent and
duplicative rules).
We found the outcome of this discussion extremely useful in further
promoting coordination and cooperation among themselves, and will
continue to meet and consult regularly to coordinate in order to
address any outstanding issues.
Last but not least, with the deadline of G20 commitment coming
near, we will continue to need to push ahead aggressively to put in
place the legislation and regulation for OTC derivatives reforms
promptly and act to identify and address conflicts, inconsistencies and
gaps in our respective national frameworks, including in the cross-
border application of rules, so that we can achieve the G20's goals of
improving transparency in the derivatives markets, mitigating systemic
risk, and protecting against market abuse. We should make use of the
opportunity that international forums such as IOSCO and the FSB could
provide in supporting the work of OTC derivatives market regulators.
Thank you very much for providing this opportunity to share my
views with you today. Let me emphasize once again that, as agreed by
international regulators last month, regulators intend to cooperate and
coordinate each other much more closely and address the important
issues related to cross-border regulation. It is a huge challenge, but
one that has to be pursued, if we are to have globally interconnected
financial markets that serve well to help growth in the real economies
worldwide. Finding sensible, pragmatic cross-border solutions for
global OTC derivatives trading is a test case for the global financial
reform process. And it is urgent. We would be most grateful if you
could provide your insights or suggestions in this regard. Now I will
be delighted to respond to any questions you may have.
The Chairman. Thank you, Mr. Kono.
Mr. Pearson is also recognized as a representative of a
foreign organization whose statements are being provided under
the terms of the diplomatic immunity given to officials of the
European Union. The statements are being given in cooperation
and freely for the information of the U.S. House of
Representatives and the House Committee on Agriculture.
Mr. Pearson, you are recognized for 5 minutes.
STATEMENT OF PATRICK PEARSON, HEAD, FINANCIAL
MARKET INFRASTRUCTURES UNIT, INTERNAL MARKET AND SERVICES
DIRECTORATE GENERAL, EUROPEAN
COMMISSION, BRUSSELS, BELGIUM
Mr. Pearson. Thank you, Chairman Conaway, Ranking Member,
and Members of the Subcommittee, for inviting me to testify
today. My name is Patrick Pearson. I represent the European
Commission. We have the rulemaking powers in this specific area
together with the European Securities Market Authority (ESMA).
Now, the reason for our work and the reason why we are here
today are absolutely persuasive. The financial crisis exposed
serious shortcomings to the OTC derivatives markets, it
amplified shocks, and it impacted our economies in several
ways. Our economies, our companies, our citizens, our taxpayers
in the United States as well as in Europe and other parts of
the globe are still paying for these shortcomings.
We have reached a global consensus. We have a plan. The
United States and European Union have shown genuine leadership
in pushing for global regulatory reform. Now, these derivative
reforms involve a significant change in regulation to cover
both the regulation of firms, legal entities; it covers the
regulation of transactions, of contracts, and we have been
working in parallel with the United States' agencies over the
past 30 months to adopt the legislative reforms to achieve
common goals.
The United States adopted the Dodd-Frank Act. Two months
later, the European Union made its own proposals--European
Market Infrastructure Regulation (EMIR). That legislation
entered into force on the 16th of August of this year and, as
in the United States, many technical rules will need to enter
into force in the coming weeks to enact these requirements. The
European Union hopes to enact its technical requirements before
this Christmas.
Now, the Commission has worked closely with the CFTC and
the SEC over the past years, often successfully. We have tried
to align our requirements with your approaches. The Chairman of
the CFTC and European Commissioner Michel Barnier, have met in
Brussels and in Washington on a number of occasions to discuss
derivatives reforms, a very useful process. International
regulators, as Mr. Kono has made clear, have met recently in
New York. We made some progress, cooperation, info exchange,
consultation; but crucially, there is one key area where there
is no progress and no agreement, and that is cross-border work.
And why is that crucial? It is because that $640 trillion
OTC derivatives market is global. The Euro, the dollar, are the
most important underlying currencies for derivatives. And the
global nature of OTC markets with the two counterparties to
transactions frequently located in different jurisdictions to
each other or in a different location to the infrastructure
being used makes the effective use of regulation absolutely
critical. So we need rules that work not only for a national
jurisdiction but also rules that work between jurisdictions.
And even reforms that are consistent and coherent within one
jurisdiction can have significant adverse impacts applied to
cross-border transactions, even if we have apparently similar
rules.
We did a recent detailed analysis of the U.S. and European
rules and we identified numerous--80 pages--of potential
conflicts, inconsistencies, gaps between our rules that have to
be addressed. If we don't, many of our collective reform
efforts to reduce risk will remain obsolete. Example: it is
quite possible that two parties to the same transaction can be
required to trade in different venues, clear on different DCOs
or CCPs, report to different trade repositories. Trade could be
subject to clearing in one jurisdiction and to margin
requirements in another, and this is particularly relevant to
corporate end-users. Companies will not be able hedge their
risks, risks will be concentrated within jurisdictions, and
contracts simply will not be cleared. We defeated the
objectives we agreed to attack.
So what is the problem? There were three. First, scope. We
have significant concerns with the proposals from the CFTC that
would extend the territorial reach of its rules to
counterparties outside of the United States. This immediately
creates conflicts, undue burdens to market participants. Firms
and traders will fall under two rules--U.S. rules and foreign
rules. The only choice they have is whose rules to break--the
United States' rules or European rules?
The scope of persons who are subject to the application of
our respective rules and regulations must be defined in a
narrow manner. It has to be based on the establishment of the
counterparty in the territory of our jurisdictions. And what is
really important is that all the counterparties in two
jurisdictions are subject to the requirements we all agreed to
to ensure global safety. And we believe this is better done by
ensuring comparability of rules than by overextending the reach
of national rules.
My second point--the principles of recognition of
equivalent substituted compliance are critical to a cross-
border regulatory regime. We believe that the CFTC is too
modest in the way it proposes to use substituted compliance. It
should be applied more broadly. It should not only apply to
entity requirements but also to transaction requirements. It
should apply also to transactions between domestic U.S. and a
third country counterparty. The CFTC has the powers to do this.
It has done this in the past. Why not here?
Third, registration. Registration might be unavoidable, but
if you do it, you need to do it from the beginning with
recognition and substituted compliance. Market participants
must have absolute possibility and certainty ahead of any
registration. Foreign swap dealers are being told to register
without knowing the complete set of rules that will bind them
as a consequence up front, how they will be applied in an
international context, and once registered, you cannot de-
register. This isn't Facebook we are talking about. There are
some significant issues.
And finally, timing is absolutely essential. We need cross-
border rules that are right and not just rapid. We are strongly
urging U.S. regulators not to enforce rules that will obstruct
cross-border business before solutions for cross-border
transactions have been finalized. The CFTC is intent on
introducing its rules where the SEC's intentions in the same
field are still unknown to us. Regulatory certainty is simply
not available internationally. And a well known saying goes if
you want to do something fast, you do it alone; if you want to
do something right, you do it together.
So concluding, if we don't reach agreement on a sensible
cross-border approach, then conflicts, inconsistencies, and
gaps will persist. Trades won't take place. It won't be
cleared. It will be reported in a fragmented way. Companies in
our economies will not be able to hedge risks they have to
hedge to do business, commercial or financial. And to quote a
historian we all know well, Tacitus, ``They created a desert
and then called it peace.'' That is what we want to avoid here.
We need to do this together, the right way.
Thank you for listening to me.
[The prepared statement of Mr. Pearson follows:]
Prepared Statement of Patrick Pearson, Head, Financial Market
Infrastructures Unit, Internal Market and Services Directorate General,
European Commission, Brussels, Belgium
Chairman Conaway, Ranking Member Boswell, and Members of the
Subcommittee, thank you for inviting me to testify at today's hearing.
My name is Patrick Pearson, and I am the Head of the Financial
Market Infrastructures Unit at the European Commission. The European
Commission is responsible for the preparation and enforcement of
legislation in the European Union. The European Parliament and the
Council are responsible for the final enactment of that legislation,
while the European Commission, together with the European Securities
Market Authority (ESMA), has direct rulemaking powers in technical
areas and in determining the `equivalence' of the rules of foreign
countries.
The financial crisis exposed serious shortcomings with respect to
the OTC derivatives market which amplified shocks and impacted our
economies in several ways. Collateral calls generated by sharp
movements in the mark-to-market value of the OTC derivative trades
drained liquidity buffers and provoked the fire sales of assets.
Second, the bilateral nature of the OTC derivatives market--between the
two parties to the contract--be it dealer and customer or dealer and
dealer-created its own set of difficulties. When counterparties became
concerned about the health of a particular dealer, they moved their
business and collateral with them, which worsened the funding crunch in
the market. Third, when a large counterparty, Lehman Brothers, filed
for bankruptcy, it could no longer meet its obligations. Open OTC
derivatives positions with its customers were frozen, which created
large problems for Lehman's counterparties. Fourth, the opaqueness of
the OTC derivatives market made the situation much worse because no one
had clear insight into the financial health of their counterparties.
Because there was no easy way to know who was in difficulty or not, the
incentives were all on the side of assuming the worst--closing out open
trades, hoarding liquidity, and retreating to the sidelines.
The crisis made it crystal clear that the regulatory regime had not
kept pace with the rapid growth of the global OTC derivatives market.
In assessing the shortcomings of the OTC derivatives market after the
crisis, a global consensus has been reached. The United States and the
European Union showed genuine leadership in pushing for this global
consensus.
Standardizing trades improves transparency and price discovery.
This mitigates the opaqueness that helped to generate the illiquidity
and loss of market function evident during the crisis. Clearing such
trades through CCPs reduces the aggregate amount of risk in the system.
In a CCP framework, the bilateral exposures of each dealer to one
another are replaced by a single set of claims to and from the CCP.
Inserting a CCP in between two counterparties to a trade reduces the
run risk faced by a potentially troubled dealer. If trades with the
dealer are cleared through a CCP, direct exposures to the dealer are
eliminated and replaced by exposures to the CCP itself. Mandatory
reporting of trades to trade repositories is designed to ensure that
the details of each contract are preserved and available to the
regulatory authorities. They will have a full overview of risk in the
system. Finally, the fact that CCPs will be central to the system
dramatically increases their importance. In essence, global CCPs will
be systemically important. Thus, for the system to be safer, it is
necessary that CCPs be as safe as the United States Bullion Depository.
They have to have the ability to perform and meet their obligations
regardless of the degree of stress in the financial system and even if
one or more of their participants were to fail in a disorderly manner.
Hence, there is a compelling need for tougher principles that are
broadly enforced.
These derivative reforms involve a significant change in
regulation, covering both the regulation of firms (legal entities) and
the process for entering into and performing individual derivative
transactions.
The U.S. and the EU have been working in parallel over the past 30
months to adopt the necessary legislative reforms to achieve these
common goals. The U.S. adopted the Dodd-Frank Wall Street Reform
Consumer Protection Act in July 2010, including some 80 pages (Title
VII) on derivatives reform. Two months later, in September 2010, the
European Commission adopted its legislative proposal to introduce
similar reforms in the 27 Member states of the European Union. This
legislative proposal--the European Market Infrastructure Regulation
(EMIR)--which runs to some 60 pages was adopted by the European
Parliament and the Council last July. It entered into force last
August. As in the U.S., many detailed implementing rules need to be in
place to specify the technical details of the legislation. In the U.S.
the CFTC and the SEC are advanced in this process. The EU will adopt
its technical implementing rules before the end of this year.
The European Commission has worked closely with the CFTC and the
SEC over the past years. Staff have held many meetings, sometimes even
on a weekly basis, to understand and discuss the thrust and details of
our respective approaches and draft rules. Wherever possible we have
attempted, often successfully, to align our approaches to avoid
discrepancies. The Chairman of the CFTC and European Commissioner,
Michel Barnier, have met in Brussels and Washington to discuss
derivatives reform on a number of occasions. This has been a very
useful process of international cooperation.
Nevertheless, there remains one key area where we believe further
work is required to deliver reforms that will meet our common
objectives. Our respective rules must also work on a cross-border
basis.
This is important because the $640 TR OTC derivative market is
global. The Euro or the U.S. dollar are the most important underlying
currencies used for OTC derivatives. The global nature of OTC
derivatives markets, with the two counterparties to transactions
frequently located in different jurisdictions to each other, or in a
different location to the infrastructure being used, makes the
effective and consistent regulation of cross-border activity crucial.
We need rules that work not only for regulators and market
participants in a national jurisdiction, but also in a cross-border
environment and between jurisdictions. OTC derivative reforms that are
consistent and coherent within a single jurisdiction can have adverse
impacts when they apply to cross-border transactions. This is so even
where the different jurisdictions involved have apparently similar
rules. Cross-border application of multiple rules will inhibit the
execution and risk management of cross-border transactions. Recent
detailed analysis of U.S. and EU rules has identified numerous
potential conflicts, inconsistencies and gaps between our rules that
should be addressed through mutually acceptable solutions. Failure to
address these issues will render many of our collective reform efforts
to reduce risk in the system obsolete.
By way of example, it is possible that two parties to a transaction
may be required to trade in different venues, clear on different CCPs
or report to different trade repositories. Trades would be subject to
mandatory clearing in one jurisdiction and to margining requirements in
another jurisdiction--this is particularly relevant for corporate end-
users.
In order to achieve the effective and consistent implementation of
our objectives, 2 weeks ago international Treasury departments,
regulators and central banks meeting in the Financial Stability Board
insisted on international coordination on the cross-border scope of
regulations and cooperation on implementation in order to avoid
unnecessary overlap, conflicting regulations and regulatory arbitrage.
To be more precise, `scope' is the root cause of many cross-border
problems that we have identified. We have significant concerns with
proposals from the CFTC that would extend the territorial reach of its
rules to counterparties outside the USA. This will create conflicts and
undue burdens for market participants. The scope of persons who are
subject to the application of our respective rules and regulations
should be defined in the most narrow manner possible and be based on
the establishment of the counterparty in the territory of our
respective jurisdictions, where those jurisdictions have comparable and
consistent requirements. What is important is that all the
counterparties in two jurisdictions be subject to the requirements we
all agreed to in the G20 to ensure global safety. This is better done
by ensuring comparability of rules than by over-extending the reach of
national rules. What ultimately matters is where the counterparties to
a transaction are established, not the location where that transaction
is concluded.
The principles of `recognition', `equivalence' or `substituted
compliance'--as referred to in our respective jurisdictions--are
important underpinnings of a cross-border regulatory system.
`Substituted compliance' will avoid the application of multiple rules
to the same entity or the same transaction. Appropriate deference to
foreign regulations is the most effective means of achieving our shared
goals. We applaud the CFTC for proposing to rely on substituted
compliance in the application of its OTC derivative rules. We agree
that where different requirements achieve the same objectives market
participants, intermediaries and infrastructures should be subject to
one set of rules for their cross-border activity. We also believe that
the CFTC is too modest in the way it proposes to use substituted
compliance; it should be applied more broadly. We believe that the
following key points should be applied by the U.S. regulators:
First, regulators should apply substituted compliance between a
domestic and a third-country counterparty established in a
jurisdiction with comparable and consistent requirements, and
should not seek to restrict this only to transactions between
two non-domestic counterparties. The former situation reflects
the area where the large majority of conflicts and
inconsistencies exist between our rules. It is therefore
necessary to apply one set of rules to such transactions to
ensure legal certainty for cross-border transactions;
Second, substituted compliance should apply to transaction level
requirements between counterparties in different jurisdictions,
and not only to entity level requirements as U.S. regulators
have suggested. Where transaction level requirements are
comparable, counterparties should e able to discharge their
obligations by complying with one set of requirements. We
believe that the CFTC has the statutory powers to do this, and
has even done this in the past in other areas of its
rulemaking.
Third, foreign infrastructure which is subject to comparable
requirements in its own jurisdiction should not be required to
comply with domestic requirements in order to service the
domestic market. Agreement on this is essential to ensuring
clearing obligations can be complied with in respect of cross-
border transactions.
We also believe that registration should be required only in
respect of those jurisdictions that lack comparable and consistent
requirements. To the extent that registration is unavoidable, it should
be combined, from the very outset, with recognition/substituted
compliance in order to limit as far as possible any legal complications
and burdens. Market participants must be afforded absolute certainty
ahead of any registration in respect of the consequences if they apply
for registration. However, the registration approach suggested by the
CFTC has serious shortcomings. Foreign Swap Dealers would be required
to register without knowing with sufficient certainty the complete set
of rules that will bind them as a consequence, and how those rules will
be applied in an international context--including how substituted
compliance will work. A possible waiver or no action letter could
provide solace. However, this will only delay, but not eliminate the
problem. Even if registration only triggers certain trade reporting
requirements, lack of substituted compliance could immediately create
issues in terms of conflicting requirements. For example, conflicts
with data privacy and data protection considerations in national and
European law may well arise. We cannot put firms in the impossible
position where they are forced to choose between breaching either U.S.
law or EU law. Applying a registration requirement to EU firms without
up-front clarity about whether and how substituted compliance will
apply will do precisely this.
Finally, timing is essential. We need the right cross-border rules,
and not just rapid rules. We would strongly urge U.S. regulators not to
enforce rules that will obstruct cross-border business before any
solutions for cross-border transactions have been finalised.
If we do not reach agreement on a sensible approach to applying our
rules on a cross-border basis, and entities and particularly
transactions are not subject to full substituted compliance, then
conflicts, inconsistencies and gaps will persist, and we believe that
trades will not take place, will not be able to be cleared and will, at
best, be reported in a fragmented manner to repositories. In short,
firms in our economies will not be able to hedge risks, commercial or
financial, and our common objectives agreed in the G20 will not be met.
The European Union is committed to creating an appropriate
regulatory framework for OTC derivatives that provides comprehensive
oversight, ensures systemic stability and promotes market transparency.
The EU, like the U.S., is in the final stage of implementing the rules
to achieve these policy objectives. We are also committed to working
with you and other market participants to ensure that our rules work on
a cross-border basis. We look to the U.S. to work with other
jurisdictions to achieve our common objectives.
Thank you, Chairman Conaway and Ranking Member Boswell. I
appreciate the opportunity to testify, and look forward to your
questions.
The Chairman. Thank you, Mr. Pearson.
We have been joined by the Chairman of the full Committee,
and I would recognize him for 5 minutes.
OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN
CONGRESS FROM OKLAHOMA
Mr. Lucas. Thank you, Mr. Chairman, and I apologize to the
Chairman and the Ranking Member and our panel here today, lots
of things going on. At various points recently, I sort of feel
like a derivatives regulator with all of the stuff swirling
around me. That said, I appreciate the Chairman holding this
timely and important hearing to examine the real challenges
that are facing both the U.S. and international regulators as
we attempt to balance the various reforms across the global
marketplace. And I hope that we can all agree that reforming
the OTC derivatives marketplace is a global effort--as has been
alluded to by our panelists--that demands genuine coordination,
not the appearance of coordination. If due care is not taken to
complement the regulatory structures across foreign
jurisdictions, we could seriously jeopardize the efficiencies
currently found in the global market whose nominal value well
exceeds $600 trillion--yes, trillion dollars.
And Ms. Sommers, I want to congratulate you and thank you
for addressing numerous cross-border issues at the Commission's
Global Markets Advisory Committee on November 7. I share many
of the concerns echoed at that meeting. And Commissioner
Chilton, I appreciate you testifying today and look forward to
hearing, as we have heard, your views. I also want to echo my
thanks to Mr. Kono and Mr. Pearson for taking time out of their
extremely busy schedules to travel literally thousands of miles
to testify before the Committee. I think that fact alone should
demonstrate that the rest of the world is serious about getting
derivatives reforms right and the United States should
reciprocate that level of concern.
And it is my hope that today's hearing will continue to
foster genuine dialogue and actual sincere coordination between
the U.S. and international regulators. Without proper
coordination, American end-users will face higher costs because
it will cost more or be impossible for some of them to access
the global markets to manage risk.
And finally, we must remember the United States was the
first nation in the world to enact derivatives reform
legislation, and as the first-mover on reform, we cannot take
an approach that is substantially more restrictive than foreign
jurisdictions or U.S. institutions will cease to remain
competitive around the world. This is a result we cannot and
must not allow to happen at any cost.
With that again, I thank the Chairman and the Ranking
Member. I yield back and look forward to some fascinating
questions.
The Chairman. I thank the Chairman.
The chair would remind Members that they will be recognized
for questioning in the order of seniority for the Members who
are here at the start of the hearing. After that, Members will
be recognized in the order of arrival. And I appreciate the
Members' understanding.
I now recognize myself for 5 minutes.
Again, thank you for coming this morning.
As we talk about trying to harmonize across international
borders, I am very troubled by the fact that the SEC and the
CFTC can't issue a common U.S. persons definition. It is my
understanding that you can have the circumstance where you
would be a U.S. person for swap dealer standpoint and a non-
U.S. person for a securities swap. It makes no sense. Is there
some law that prevents the CFTC from issuing a joint rule or
joint guidance that would at least harmonize on our side of the
various oceans? Either one, Ms. Sommers or Mr. Chilton.
Ms. Sommers. I don't think there is anything certainly that
prevents us, and I want to stress that we have been
coordinating with the SEC all along. There are just fundamental
differences in both Commissions' approach to the cross-border
issues.
The Chairman. But do those fundamental differences mean we
will in fact have two separate definitions that the world will
have to deal with----
Ms. Sommers. Right. That is right.
The Chairman. There is no common ground that you can come
to?
Ms. Sommers. There is common ground and I believe that the
staff is still working to come to a common agreement on those
issues, but right now, we are not there.
The Chairman. Yesterday, Chairman Gensler told the
Financial Services Committee to expect to have some additional
rules by the end of the year. I am not sure how the Commission
works, if the Chairman has unilateral authority and each
Commissioner does as well, but are you aware of these pending
changes or things that will be done at the end of the year? And
will that include a narrowing of the definition of U.S.
persons?
Mr. Chilton. I am not sure about the narrowing, Mr.
Chairman, but the process is a little different than just a
regular rule that we do as part of Dodd-Frank. This is the
final exemptive order that we have been sort of talking about,
moving things out for some time certain. But it could be
narrowed and that is what I called for here in my testimony--
ensuring that if you are a U.S. affiliate in a foreign
country--so you are U.S. bank XYZ but you are in another
country--that you wouldn't have to be required for this time
period certain--6 months, 5 months--to register, nor would
anybody doing any business with you. A foreign swap dealer, for
example, would have to register. So I am hopeful we can narrow
this down as you suggest.
And one thing if I might, Mr. Chairman, is that one of the
problems that we have had this--and I take Congressman Scott's
point--a lot of times this has not been graceful what we have
done by any stretch of the imagination. It has been a little
messy. But we have tried to accommodate things as we have gone
forward. We had some compliance deadlines on October 12 and it
was sort of a mess leading up to that. We have all these
questions, a couple hundred questions, letters from people. We
finally got it dealt with but it was not pretty. So I am
hopeful that we don't end up in that circumstance this year,
Mr. Chairman, at the end of this year. And certainly, if we
haven't given an answer to somebody when they have requested
guidance, I cannot imagine and I would not be supportive of the
agency taking any action against such a firm.
The Chairman. The mechanics of a 6 month extension is a
blanket extension or each individual entity has to request the
extension? What are you contemplating?
Mr. Chilton. The Commission could do it and we could do it
blanket, and what I am suggesting is a 6 month window on
compliance so nobody would have to comply for 5, 6 months,
whatever the time period would be.
The Chairman. My professional background as a CPA, we have
a similar issue with respect to 54 jurisdictions in the United
States, all of them wanting to regulate CPAs differently. The
regulatory agencies, all 54 of them and the CPAs, came together
and created a Uniform Accountancy Act, which was the standard
by which everything would be judged. And if your state laws met
the standards of the UAA, then your CPAs could practice
wherever they wanted to. Is the International Organisation of
Securities Commissions, Mr. Kono, an appropriate body to create
that standard, a uniform Act, on which all the jurisdictions
could look to when they are putting theirs together so that
they would have this substituted equivalency--or we called it
substantial equivalency in the accountancy world--to alleviate
some of these cross-border things? Is that the organization to
do that?
Mr. Kono. Thank you, Mr. Chairman.
First, I should mention that IOSCO has certainly been
effective in developing standards in certain areas, and
particularly, those standards pertain to, for example, the
rules that countries should apply or are recommended to apply
with respect to mandatory central clearing, to data reporting,
to other aspects of OTC derivatives reform.
Having said that, those are standards that will have to be
implemented by national governments and supervisors, each
within their powers and within their mandates. And therefore,
when it comes to coordination across different implementation
schedules, different rules being implemented in countries, this
coordination will have to take place amongst the regulators and
supervisors. And IOSCO could certainly facilitate that process,
but IOSCO is not necessarily a place where we can take
decisions that will be enforceable upon governments. I think we
have----
The Chairman. Okay. Yes, I understand that you can't do it
on their behalf, but if they had to go by documents that put
their rules in place that comported with those, then they would
meet the equivalent standards that would allow for the
recognition of their regulatory scheme by the U.S.
Thank you.
Mr. Scott for 5 minutes.
Mr. David Scott of Georgia. Thank you very much.
Let me start with Mr. Chilton and Ms. Sommers. Again,
welcome. But before I do that, let me ask unanimous consent
that we submit this statement for the record from the Americans
for Financial Reform.
The Chairman. Without objection.
[The information referred to is located on p. 77.]
Mr. David Scott of Georgia. Thank you, sir.
As you know, Commissioner, the temporary relief that you
all approved on October 12 will expire on December 31, and that
threatens a repeat of the business losses we saw in October.
Will the CFTC act well in advance of this date to provide
certainty and clarity for market participants and customers? It
certainly seems that something definitely needs to be done. The
date December 31 is rapidly approaching; it is about 2 weeks
away.
Ms. Sommers. Unfortunately, as you know, we are already at
December 13. I think it is both my hope and Commissioner
Chilton's hope that we have something that is clear and that
clarifies all of these issues for market participants within
the next week.
Mr. David Scott of Georgia. All right. And Commissioner
Chilton, earlier this year, you gave a speech where you
provided an estimated timeline for the implementation of Dodd-
Frank rules, and you suggested that cross-border guidance be
finalized by June 2013. But is this when you expect the CFTC to
vote on the measure?
Mr. Chilton. I would hope that we could do it now, like
ASAP, Congressman, and then have the compliance delayed until
June 1 or perhaps July, whatever make sense. I am not a
stickler on whether or not it is a month or so. As I said, I am
not sure that that makes everything super graceful, but it will
help. When I talk with the financial firms, part of the concern
is that it is disjointed. It is like Chairman Conaway was
saying, people are going at different rates and speeds, and so
if we do it at the same time when there is sort of a date
certain, that will help at least.
Mr. David Scott of Georgia. All right. Mr. Kono, let me ask
you. During the SEC's Global Market Advisory Committee meeting
on November 7, you stated that some firms outside the United
States have started to decline transactions with the United
States companies because of the uncertainties in the rules and
the apparent lack of coordination between regulators. And
indeed, I think this is what we saw in October. But in your
current observations, have U.S. regulators taken sufficient
action to clarify this uncertainty?
Mr. Kono. Thank you very much for your question. I think
that since then, we have been doing our utmost efforts in
actually providing more clarity to our market participants, and
of course initially, there was this reaction of wait-and-see.
But now, I can testify that Japanese financial service
providers are able and willing to conduct normal business with
their U.S. counterparts once, of course, the rules become a
clear and they are made known to them. I think there is still
some work to be done in that respect so the uncertainty is
being removed, but we still have some more work to do.
Mr. David Scott of Georgia. Thank you very much.
Mr. Pearson, I found your testimony to be very revealing
and very consequential. I think it would be important to get a
reaction from your recommendations from Ms. Sommers and Mr.
Chilton in your efforts on this whole issue of cross-border
extraterritorial. You stated your recommendations and major
concerns were scope, registration, and timing, and you sort of
laid the gauntlet down to challenge our regulators. And so Mr.
Chilton and Ms. Sommers, how do you react to what he said and
do you accept the challenge and the recommendations that he has
offered? Or do you find any problems with adhering to those?
Ms. Sommers. Congressman, I think that the difficulty for
us right now in working with our global counterparts, as I
alluded to in my testimony, is not just substance. There are
issues with regard to substance that we continue to work on,
but because the United States is requiring compliance with the
Dodd-Frank rules that we have already finalized, it adds an
enormous amount of challenges to firms who are trying to
operate. Without knowing how we are going to apply Dodd-Frank
extraterritorially, asking people to comply is where the
problem is. So we are hopefully going to be able to issue some
type of relief to both foreign and domestic swap dealers within
the next week, and I think that is where the agreement that at
least I have and I believe Commissioner Chilton has with Mr.
Pearson's testimony. We do believe that that relief needs to
happen for compliance while we are working out all of these
details before we can all come to the same place and coordinate
on all these rules.
Mr. David Scott of Georgia. Thank you very much.
The Chairman. I thank the gentleman.
I ask the Committee's indulgence to recognize the Chairman
of the full Committee for 5 minutes.
Mr. Lucas. And I appreciate the Chairman and the
Committee's indulgence.
Commissioner Sommers, on or before October 12, the CFTC
issued a number of staff no-action letters and interpretations
to address many of the outstanding concerns and uncertainties
surrounding implementation of its new derivative rules. Are the
four other Commissioners outside of the Chairman's office
consulted by CFTC staff on no-action relief letters or
exemptive orders prior to their release?
Ms. Sommers. Well, I think this process has been
overwhelming for all of us. The answer would be sometimes we
are and sometimes we are not. Certainly, before October 12,
there were dozens of no-action letters that we issued and we
are in the same place now before the end of the year because
these compliance statutes are kicking in. We have had dozens of
requests for additional pieces of no-action relief. These are
issued by staff. The no-action letter is saying that staff has
agreed to not take enforcement action against these entities
for not complying with issues. Sometimes the Commission is
aware of those requests and sometimes we are not.
Mr. Lucas. But in the aftermath, the Commissioners all see
these documents?
Ms. Sommers. We do see the no-action letters, yes.
Mr. Lucas. Yesterday, at the House Financial Services
Committee meeting, Chairman Gensler was asked about the cost-
benefit analysis performed by the Commission on cross-border
guidance, and he asserted that it had in fact been done. Are
you aware of any such analysis?
Ms. Sommers. There is a cost-benefit analysis within a
proposed exemptive order that is circulating within the
Commission right now. There is a cost-benefit analysis within
that document.
Mr. Lucas. Well, let me ask this question then. The
Chairman asserted that he had approximately 40 different cost-
benefit analyses on different rules. How many of those analyses
have been shared with you, or Mr. Chilton for that matter?
Ms. Sommers. Typically, they are included within the drafts
of the rules. There is a cost-benefit analysis included. It
differs certainly with regard to how thorough those analyses
are.
Mr. Lucas. Mr. Kono, what do you say to reports that
foreign firms stopped doing business with U.S. firms for fear
of being swept up in the U.S. regulatory regime?
Mr. Kono. Thank you very much. I think it is fair to say
that insofar as the Japanese financial service providers are
concerned, they are willing to comply with U.S. rules once they
are, of course, made transparent and also that they are given
enough time to comply. And I don't think that anything would
lead us to think that all of the requirements will be too
onerous for foreign providers to comply with; it is just that
we need more transparency.
Mr. Lucas. But it is fair to say that foreign firms are
concerned about how this process will evolve?
Mr. Kono. They are reasonably concerned, but at the same
time, they do register recent progress and I mention that.
Thank you.
Mr. Lucas. Mr. Pearson, what are some of the potential
consequences that would result from conflicting swap dealer
regulatory regimes if you would expand on your testimony of
course?
Mr. Pearson. Congressman, the results and consequences that
we have been able to analyze is that depending on the conflicts
between the rules and requirements of the United States and the
27 countries of Europe, trades will not be able to be cleared.
If they can't be cleared, they won't take place. This means
that firms, end-users will not hedge their risks; or firms will
hedge their risks but they will only take place within one
jurisdiction, which means that risk will be concentrated in one
jurisdiction on the planet. That could be the United States. If
your firms can't hedge their risks outside of the United
States, they will have to hedge them here. The consequences of
that is obviously a fragmented market and a significant
concentration of financial risk in the U.S. system. And this is
exactly what we tried to prevent with our global regulatory
reform.
Another consequence is that perhaps firms that will be able
to conclude a contract but it is not clear which rules apply to
that contract. If it is not clear which rules apply to the
contract, you run obviously legal risk. Which rules do you
apply; which rules do you not apply?
A third consequence is that a contract might be able to be
concluded, but the contract is reported for regulatory purposes
to different jurisdictions and different swap data
repositories. This means that the regulators and the
governments will not have that overview of this important and
significant market that we wanted to have. A global overview
aware of the risks, who is bearing the risks, which financial
firms in our economies are exposed to those risks? So that
means that none of the objectives we tried to agree on in the
G20 will be met.
Mr. Lucas. Thank you, Mr. Pearson. And I appreciate the
indulgence of the Chairman and the Ranking Member and yield
back the time I do not have.
The Chairman. Thank you, Mr. Chairman.
The chair recognizes Mr. Courtney for 5 minutes.
Mr. Courtney. Thank you, Mr. Chairman. And I really again
appreciate the fact that you have organized this hearing on
Dodd-Frank implementation, which unfortunately Congress hasn't
been around much the last couple months and a lot of things
have been happening. And I apologize to some of our guests here
from outside because I did want to focus on another issue which
you have been grappling with.
Again, I think the last time the two Commissioners appeared
before this Committee, gas prices were about $4.25, $4.30 up in
New England. Today, they are about $3.50, $3.40. I think Rhode
Island is $3.30. Obviously that is a pretty dramatic drop,
about 20 percent. End-users that I talk to, whether it is
farmers, oil delivery guys, the cynicism with which they regard
this market that is seeing this type of swing--I realize
refineries were offline and now are back online. I mean there
are some things that actually happened in the real world that
might explain some of it, but the fact is is that nobody really
believes that that drastic a drop can be explained by real
market factors.
And Dodd-Frank had a specific provision, and Commissioner
Sommers, the language from Congress, which you eloquently
talked about in your remarks, could not have been more crystal
clear about the dictate to the Commission to put some position
limits in almost a year ago. And obviously the court decision
was a big disappointment that came down. Again, I would
appreciate it, Commissioner Chilton, if you could give us an
update in terms of where we stand regarding the legal case and
where the Commission stands in terms of trying to address this.
Mr. Chilton. Thank you for the question and thank you for
your leadership, Congressman, on that particular issue,
speculative position limits. The agency has appealed the
district court's decision, yet staff is currently working--and
we haven't seen a draft yet--on yet another rule. It is a
little bit in the weeds. I will try to make it sort of high
level. The court said that we have two authorities. We have the
Dodd-Frank authority to establish speculative position limits,
which we used. The court just said we should have explained why
we needed to use that. And the law was pretty clear to me. I
mean it said the agency shall establish appropriate position
limits. But the case went to the word appropriate. What is
appropriate? The court said, well, you should say why you are
doing it, what is appropriate.
The second authority that the judge said that we have,
which we know we have, is a 1936 authority, and so I believe
that the rule that we propose, yet another rule--so the appeal
is going along at one rate and then the other rule that I hope
we will approve sometime in the first quarter of the year--we
will use both the 1936 authority and the Dodd-Frank authority.
It will have the added benefit, this rule I hope, of doing an
improved cost-benefit analysis, which was one of the other
challenges in court. When we did the cost-benefit analysis, we
did it based upon the information we had from market
participants, but it wasn't very detailed because they didn't
know. Now, because all of this was supposed to happen October
12, they know how much it costs them, so I am hopeful that our
rule will also include a better, more improved cost-benefit
analysis.
Mr. Courtney. Well, thank you. And I would just say this,
again, with two Commissioners here. You know, for people who we
go home and try and explain what is going on in Washington to
deal with this issue, which again just goes to the heart of our
economic recovery. Whether it is a nurse going to work in the
morning who is dealing with high gas prices or a small business
who is trying to stay ahead of this, the inability of us to
even explain what the heck is going on and what is being done
about it, again it just puts everyone in an impossible
position. And frankly, the fact that the Commission appears to
be divided in terms of even a decision of whether to file an
appeal is very disappointing because just at some point what we
are talking about here is not about sort of your job; it is
about people's jobs every single day out there in the real
economy. And they are counting on you to do something.
And again, this is one of my last appearances in this
Committee because I am going to be moving on in the next
Congress, and I just, again, appreciate the Chairman's focus on
this issue because it really does go to the heart of whether or
not we are going to have a real recovery. And what you do,
which is not that well understood out there in the public, is
just critical. So please, when you are looking at these
issues--Dodd-Frank didn't happen because people just wanted to
create some regulatory structure. There was a real need in
terms of what happened in 2008 and it is still going on today.
I yield back.
The Chairman. The gentleman yields.
The gentleman from Iowa, Mr. King, 5 minutes.
Mr. King. Thank you, Mr. Chairman. And I thank the
witnesses for their testimony, especially those that came the
furthest to provide that input to us today.
I would first turn to Ms. Sommers. And I noted in your
testimony that you referenced Section 722(d) and I believe that
you said that the Act shall not apply to activities outside the
United States unless those activities have a direct and
significant connection. And you referenced that it needs both.
And it is the implication that--and I don't know if I heard it
clearly--you believe the rules that are being written today are
reading that as direct or significant or how would you describe
that to me?
Ms. Sommers. Congressman, the CFTC put out a proposal for
interpretive guidance on cross-border issues in June of this
year, and that proposal suggested that if a swap had a direct
connection to the United States, it should be regulated under
Dodd-Frank. So the significant part of that definition in my
opinion was not considered appropriately.
Mr. King. They interpreted the word significant to be
insignificant, then, in other words?
Ms. Sommers. Yes.
Mr. King. Thank you. And Mr. Chilton, I listened to your
testimony in your recommendation that we not require compliance
for 6 months but it does say they finalize the rule as soon as
possible. That is generally how I hear it. And so if that is
the case, can you tell me how close we are going to be in
conformity with foreign regulators? Do we have a sense of that
at this point? I know you said we are within 6 months, but I
don't know how far apart the regulations might be.
Mr. Chilton. On the issues, sir, yes. We are closer than
some might think. I mean there are still some differences and I
am hopeful that also during that transition period that they
actually get closer. Now, when I say that, we will have pretty
much done most of ours but we still will have things that we
call interpretive guidance and we do Q&A's for people, and we
will still work with foreign regulators. I stated earlier that
everything we have done hasn't necessarily been graceful--but
we have shown that we can sort of turn around and when we make
a mistake, we certainly hear about it. You guys hear about it,
and then we hear about it from you all. So if we make a
mistake, we can fix it. I am committed to doing that, but so
far I think that this delay that we have had, Congressman, has
actually led us to a place that is much better. I thank you for
the guidance to go slow at times. I think you guys were right.
And to me, where we are now is much better a place than I
thought we would have anticipated even 6 months ago. We still
have a ways to go.
Mr. King. Who needs to move more, foreign regulators or us
as regulators?
Mr. Chilton. Well, I think we have struck a pretty good
balance, Congressman, and so I am not so sure that we need to
move much. Now, on the compliance we definitely need to do
that. And I think Commissioner Sommers and I are in lockstep on
that. But I am pretty confident with where we are on the rules
right now.
Mr. King. And you heard Mr. Kono testify that he believes
that we can rely on foreign regulators and you are comfortable
with that testimony?
Mr. Chilton. I am, particularly on the major things, the
major reasons why Dodd-Frank was created, to avoid systemic
risk, I mean, so that we don't have another $400 billion
bailout. So if there is some big fish trader in London with a
U.S. bank but he is in London and that can come back to haunt
us and maybe our taxpayers with the bailout, we either have to
ensure that the UK or the EU is regulating them or we have to
do it. If they don't have a comparable regulatory regime, we
need to protect our taxpayers by doing it.
Mr. King. Okay, that is if there is a gap. But I will turn
to Mr. Pearson and I recall your testimony, Mr. Pearson, that
you said sometimes you have to decide which rules to break.
What kind of input would you like to provide on the testimony
you have heard since you spoke?
Mr. Pearson. Thank you for the question. I think the knife
cuts two ways. It is not really the question whether UK
regulators expose U.S. taxpayers; we have faced exactly the
same issue when European taxpayers were exposed to U.S.
regulatory shortcomings--MF Global, AIG, Bernie Madoff. These
are not European companies. So we are all in the same ship
here. I think the point we are trying to make is that we have
the same objectives. If we have the same rules and
requirements, then we should be able to rely on the same rules
and requirements. Where we don't want to be is to have the same
rules and requirements which are slightly different to apply to
the same actors and to the same contracts. That is an
unworkable situation. The contracts simply will not take place
and everybody will lose. Citizens will lose, companies will
lose--they can't hedge their risks--firms will lose because
firms will arbitrate and will shift and rebook their trades to
other jurisdictions. Nobody wins. And that is where we need to
focus our attention on.
Mr. King. Thank you, Mr. Pearson. And I do think the word
significant is significant.
And I yield back, Mr. Chairman.
The Chairman. I thank the gentleman.
And the lady from Alabama, Ms. Sewell, is recognized for 5
minutes.
Ms. Sewell. Thank you, Mr. Chairman. I want to again thank
Chairman Conaway as well as Ranking Member Boswell for
scheduling this hearing today. You know, this hearing has
really given us a chance once again to hear from witnesses and
to discuss Dodd-Frank derivatives reform and some of the
challenges that we are facing both in the United States and
internationally. The 2008 financial crisis made it clear that
regulators must have transparency in the global derivatives
market in order to make educated policy decisions and to
mitigate systemic risks.
As we continue to move forward with the rulemaking in the
implementation process provisions of Dodd-Frank, I think we
need to be really mindful of the original intent and the
original purpose behind the passage of this essential reform.
Dodd-Frank was intended to add more transparency and oversight
to the financial markets and to ensure that another financial
crisis, a meltdown if you will, doesn't happen again.
This is why I stood with a bipartisan group of Congress
Members to introduce H.R. 4235, which is the Swap Data
Repository and Clearinghouse Indemnification Correction Act of
2012. It was to help ensure regulators continue to have that
transparency in the derivatives market needed to make those
crucial decisions as to how to mitigate their risk. And it is
my hope that this bill will come to the Floor in the very near
future and be considered and passed by the entire body.
I want to applaud the diligent work that both the CFTC, as
well as the SEC, has had in both drafting and implementing
these critical new regulations. I know it is hard. I appreciate
all that you all do to take into account all the various
parties that are involved in trying to make sure that we have
cogent and workable regulations. However, as Members of
Congress, we must continue to provide importance guidance and
oversight to both the agencies to ensure that there are no
unintended consequences to the original purpose and intent of
Dodd-Frank.
Additionally, many market participants, along with their
regulators, continue to voice concerns over the very lack of
rules and sufficient time to implement them. So this
Subcommittee's hearing today is critically important.
I am a former lawyer. I worked on Wall Street for the first
part of my career at Davis Polk & Wardwell and did securities
law. I think that the indemnification issue is an important
one. And given all the significant extraterritorial issues, my
question really is to either one of the Commissioners. The
CFTC, is it ever going to really support striking the
indemnification requirement and promote a passage of H.R. 4235?
Ms. Sommers. Thank you, Congresswoman. I have supported
that legislation publicly in the past, and I do think that the
only way to really solve the problems with regard to those
issues is a legislative fix. We have done everything we can in
our rule to address the issue as far as our rulemaking ability,
but I do think it needs a legislative fix.
Mr. Chilton. Yes, I agree, Congresswoman. Thank you for
your leadership on the issue.
Ms. Sewell. There have been considerable debates around the
intent of the Section 722 of the Dodd-Frank and the aggressive
approach being taken by the CFTC to apply derivatives rules to
the U.S. banks doing business overseas with foreign clients. I
am concerned that the CFTC's application of section 722 and its
expansive view of what is direct and significant connections
with activities in and effect on commerce in the United States,
what that means. And the proposed cross-border guidance misses
the mark in many ways in really explaining and ameliorating
that problem with the CFTC moving ahead to apply the Dodd-Frank
rules abroad without real clear harmonization. And many
international regulators are quite concerned about the
conflicting laws for those entities. And I really wanted to ask
you whether you thought that it would lead to greater conflict
if not resolved, specifically Section 722?
Mr. Chilton. Thanks, Congresswoman.
I think the issue really comes down to, ideally, what we
would all like, is to allow for comparable regulation by
foreign regulators, but we have no desire to have little CFTC
deputy agents running around Brussels. It is just a matter of
everybody coming together, which is why this timing delay is so
critical so that we are all doing it sort of together.
There can be some sort of disagreement about what is
significant. The Dodd-Frank Act was trying to get at the big
things that were systemic risks that can bring down our
economy, so I am hopeful that ultimately everybody will have
their own regulations on the big things like systemic risk,
capital, margin, those things, transparency like swaps data
repositories. Those things, they need to be pretty close on the
language--not identical but pretty close. And then there is a
whole list of other things where they don't necessarily have to
be so close. But on the key fundamental things, the things that
impacted the entire global economy, those have to be fairly
close together, at least that is my view.
Ms. Sewell. Thank you. Thank you all for your participation
in the hearing.
The Chairman. Mr. Scott for 5 minutes.
Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
And I, like you, come from one of those highly regulated
industries, and Mr. Chilton, I can't help but laugh when you
say if the regulators make a mistake, they will fix it. And I
wonder is being one of the regulators, at what cost to the
regulated does that come?
But we are here today because this has an important impact
on global trade. And 80 percent of the world trade is outside
of the United States. Our trade partners, our global trade
partners in general are also our allies when it comes to, in
many cases, more difficult issues, and we need to make sure
that this is implemented in a manner that doesn't hinder
commerce.
I listened as Mr. Pearson talked about scope, registration,
timing, and other challenges that still remain with regard to
the rules. And I have listened to you, Mr. Chilton, say that we
need to have these timing delays so that we are able to get on
some of the same page if you will. Is that correct? Yet you
contradict yourself when you say we are going to go ahead and
pass our rule in the United States--this month as I understand
it--but we are going to delay the implementation for 6 months
essentially to give the rest of the world 6 months to come in
compliance with the U.S.
Mr. Chilton. Well, there may be a little minuti# there that
will save my potential contradiction, and that is we put out a
proposal, Congressman. I believe it is fairly well done. It
strikes a fairly good balance. But we do have an interpretive
guidance and it does allow us to continue this dialogue, which
Commissioner Sommers has been engaged in through the GMAC and
the Chairman has been engaged in, so it doesn't mean that we
can't move. It doesn't mean that this is it and there is
nothing else that can be done. But look, in fairness, we were
first. We have had some time to do this and the EU has been
sort of playing catch-up and they have done a remarkable job.
But we have a proposal out there and I hope people will
continue to look at it and ultimately we will have comparable
regulations across the globe.
Mr. Austin Scott of Georgia. Mr. Chilton, with due respect,
once it becomes a rule, it is no longer a proposal. It is no
longer a proposal once you adopt it in December. Now,
compliance with it, you can delay compliance for 6 months, but
the bottom line is once you adopt that rule, firms must start
to come into compliance with your rule, because when you turn
on the compliance of it, they don't get 6 months from the date
you turn it on; they get 6 months from the date you implement
it to the date you turn it on. And if they are out of
compliance on day two, then they are in trouble. And if you
have made a mistake, you said you can fix it, but with all due
respect, it will come at a tremendous cost to the people who
are regulated and maybe to the U.S. economy because we----
Mr. Chilton. Yes, I hope I am not talking past you,
Congressman----
Mr. Austin Scott of Georgia. You are not talking past me, I
can assure you.
Mr. Chilton. Okay. I didn't mean it as an insult. I meant
that maybe I am not expressing myself correctly. So we have
interpretive guidance. We are doing that all the time. I mean
we are doing it on rules that were done a year ago. We continue
to do that. And so my only point is not that the rule is not
the rule when it is done, but there are things that can be done
after the process and sometimes they will actually require
amending a rule. A lot of times they can do it on a staff
level. That was my only point, sir.
Mr. Austin Scott of Georgia. Mr. Chilton, it is better to
get it right the first time.
And Mr. Pearson, if I understand you, we still have scope,
registration, timing, other things that are still to be
discussed. And Mr. Kono, do you agree that those three things
have not been resolved?
Mr. Kono. Thank you for your question. I think we are still
very much in the process of addressing those issues. And in
fact, I did talk about reliance on foreign regulators on this
point. Of course, we are quite aware that we need to build an
element of mutual trust before this can be done, particularly
since we do understand the concerns that you have of those
risks flowing back to the U.S. from abroad. On the other hand,
to build this trust, we are determined to move forward and we
would like to have some time for it.
Mr. Austin Scott of Georgia. Yes, sir. And that is in the
best interest of global trade is to give you that time. And my
concern with the CFTC is they are going to do what they want to
do regardless of whether this Committee says no or our trade
partners, which are also our allies in military affairs, think
that that is bad for global commerce.
And I guess I would ask one last question, Mr. Pearson.
Would it make sense--and it may or may not; just think out of
the box--that a trade that was placed in Euros that the
European Union be the primary regulator of that trade since it
was placed in Euros? In other words, should the currency that
the trade is placed in matter with regard to who regulates it?
Mr. Pearson. Thank you. The currency is a key issue but
there are other leading points as well, and that is where are
the counterparties established? U.S. counterparties between
themselves can have Euro-denominated trades.
Mr. Austin Scott of Georgia. Sure.
Mr. Pearson. It would be out of the question--out of the
question--for that very reason only that the European Union
would seek to regulate that contract. And the problem is, well,
that is exactly what the CFTC attempts to do with its June
cross-border guidance. We do not believe that it is the right
thing to do the moment that one U.S. party is a counterparty to
a trade, then U.S. rules apply. It makes no sense and it is not
in line with international comity, as Mr. Kono has said.
Mr. Austin Scott of Georgia. Thank you, sir.
Mr. Chairman, I yield the time that I don't have.
The Chairman. I thank the gentleman.
Mr. McGovern for 5 minutes.
Mr. McGovern. Thank you, Mr. Chairman. I apologize for
being late.
I have a question, Ms. Sommers. I know it is a bit off-
topic but it has been awhile since you were here to talk about
MF Global and your investigation. When you testified here more
than a year ago, you said in response to a question by my
colleague Mr. Cardoza, ``there will be policy changes that we
will want to come to this Committee for your consideration.''
You also told Mr. Cuellar and Mr. Gibson that you would get
back to the Committee with a comprehensive list of lessons
learned from MF Global. Can we expect any policy changes or
lessons learned from you before the end of this year?
Ms. Sommers. Congressman, thank you for that question. My
delegation with regard to MF Global is solely with regard to
the enforcement investigation. Chairman Gensler has taken a
lead on the lessons learned from MF Global. We did issue
earlier this year a package of rule changes to our own internal
CFTC rules that had to do with customer protection, and many of
those were part of the package of lessons learned from MF
Global and were directly related to the incident that happened
through MF Global. So I do think that the Commission has moved
forward on that, but as far as lessons learned being submitted
to the Committee, I am not sure if the Chairman intends to do
that.
Mr. McGovern. So is the enforcement investigation
concluded?
Ms. Sommers. No, sir, it is not.
Mr. McGovern. And do you think it will be concluded before
the end of 2013 or----
Ms. Sommers. There is no way for me to speculate on when
the enforcement investigation will end. I can assure you that
we are working diligently on that investigation.
Mr. McGovern. A few weeks ago our colleagues on the
Financial Services Subcommittee on Oversight issued a report on
MF Global.
Ms. Sommers. Yes.
Mr. McGovern. Do you have any comments or thoughts on that
report, and do you think its characterization of the CFTC's
performance during the MF Global crisis is accurate or fair?
Ms. Sommers. I certainly do. It did reflect many of the
important issues that we all, in hindsight, realized after MF
Global happened.
Mr. McGovern. Thank you, Mr. Chairman. I don't have any
further questions.
Mr. Crawford [presiding.] The gentleman yields back.
I am going to recognize myself for 5 minutes.
Mr. Pearson, yesterday, at House Financial Services,
Chairman Gensler stated, ``We are comfortable with substituted
compliance if there are real rules over there.'' We seem to be
speaking specifically about Europe, Japan, Australia, and
Canada. And that is interesting for a couple of reasons. One,
his words call into question his repeated assurances that he
has given the U.S. Congress that he is coordinating abroad; and
second, it raises the logical question of what are the
standards by which the CFTC and Chairman Gensler will judge as
a real rule? Your thoughts?
Mr. Pearson. Thank you for the question. We went through
the process of comparing 500 pages of Dodd-Frank and CFTC draft
implementing rules with 642 pages of European rules. We have
real rules, both jurisdictions, and we have worked closely with
Chairman Gensler and the staff on this. The rules are there.
The question is also are they comparable? In many cases they
are. In many cases U.S. rules and European rules are
comparable; in a lot of cases European rules are tougher than
American rules. Example: DCOs or CCPs. This is where the risk
will be concentrated on OTC derivatives, the handful of them on
the planet: $640 trillion of risk will be concentrated in five
entities. We believe that they have to be able to stand
financial Armageddon. They need to be stronger than the U.S.
bullion depository, Fort Knox.
The European rules are tougher, stricter than the U.S. CFTC
rules on these CCPs, DCOs. Does that mean they are
incomparable? No. It means we are following the same objective.
We have differences in rules. We need to make sure that these
rules work together. We need to make sure that U.S. firms, U.S.
companies, U.S. financial firms can clear their trades in U.S.
or in European DCOs, even if, as Mr. Chilton says, the rules
are not identical, even if we go a bit further than the United
States of America.
We have been working on this. The question is not what do
the rules say? The question is are we willing to defer to each
other's rules? And as I said before, Congressman, we believe
the CFTC needs to defer more in the field of transaction
requirements than they are prepared to do at this point in
time. Otherwise, the system simply will not work.
Mr. Crawford Okay. Let me follow up on that. You recently
talked about the inconsistencies between European rules and the
CFTC approach. You stated that ``trying to regulate the cross-
border rules verges almost on rocket science'' and I can tell
you this is a potential Apollo 13 situation. The message is,
``Washington, we have a problem.'' Do still think that
Washington, or maybe better stated, the CFTC has a problem, and
what would the major issues be that are unresolved?
Mr. Pearson. Thank you. Absolutely. When I refer to
Washington, I refer to Apollo 13. My knowledge of Hollywood
films is not as extensive as those of Mr. Chilton. I will quote
the Roman historians or Shakespeare, but that is where it
stops.
Yes, we do believe we have a problem. We tried to resolve
that problem as Mr. Kono made clear. Two weeks to the day we
had a meeting in New York with international regulators. The
problem is absolutely clear. There is no issue on the table
that nobody understands. The question is to what extent are we
prepared to accept that our rules are the same and to what
extent are we prepared to defer to the rules of another
jurisdiction where we have the same or similar rules and the
same objectives? That is the problem. And the question is
simply scope. Are we prepared to limit the scope of the
extraterritorial application of our rules and requirements? In
Europe we are.
In Europe we have a rule on the table that our parliament,
our Congress has accepted. As it is said, we are prepared to
defer European rules entirely and apply Dodd-Frank entirely in
European Union if it works both ways. We need the CFTC to
understand that we need, too, to go down that route. We cannot
do it on our own. And that is where we need further work and
further discussions, Congressmen.
Mr. Crawford Thank you, Mr. Pearson. I am going to yield
the balance of my time and recognize the gentleman from
California, Mr. Garamendi, for 5 minutes.
Mr. Garamendi. Thank you. And since this is my first day in
a Committee hearing on the Agriculture Committee, I will try to
quickly catch up. And so if I cover some areas that have
already been covered, my apologies to all.
I am trying to understand the territorial thing. It seems
to me it can be worked out and is likely to get worked out here
in the very near future. It is certainly in all of our
interests to do so.
Mr. Chilton, in your testimony, you blew past an issue that
I know that you are concerned about and that is high-frequency
trading. Is there any information available today that high-
frequency trading causes disruptions or inappropriate
directions in the marketplace?
Mr. Chilton. Thank you for the question and I look forward
to working with you, Congressman, on the Committee.
The CFTC recently put out a report last week or the week
before that showed that when high-frequency traders--these
traders that I call cheetah traders because they go fast, fast,
fast--that when they are in the market they tend to gain more
when they are trading with a smaller trader or a passive
trader. A lot of these guys are sort of commercial ag folks
because these high speed traders are very, very quick. The
argument on their behalf--on the cheetah's behalf--is that they
provide liquidity to the markets, and that is obviously a good
thing in general, but it is fleeting liquidity in that they are
not there to hedge your bean or rice or corn crop for the
season; they are there for 5 seconds and they are in and out of
the market.
So there have been a lot of examples, Congressman, where we
have seen extreme volatility where these cheetah traders are in
the market. You can go back to a few months ago when we saw
crude oil go down $3 in 60 seconds. That was in part because
cheetahs were heavily in the market. So there are many
examples. We have seen it. We have seen it in India recently.
We see it in the stock market as you know. You have followed
that very often when Kraft shifted to NASDAQ.
So I am concerned that there are some basic, prudent steps
that need to be taken. They are not even required to be
registered with us now, which means that we can't request their
books and records. They are not required to test their
programs. They are not required to have kill switches, and
importantly, they are not required or we don't mandate that
they stop what they call wash trading. That is when their
trades bump into each other. They trade with themselves. And
that is a big problem in my view. I can't really talk about the
extent to which they do this cross trading, but I don't think
that is good for markets. It is illegal and we need to do a
better job of enforcing it, Congressman.
Mr. Garamendi. A quick question, maybe a quick answer. Does
the Commission have the authority to deal with these issues?
Mr. Chilton. We have a lot of authority to deal with it,
but quite frankly, it has been like drinking out of a fire hose
with Dodd-Frank. So it is one of the reasons that I raised this
earlier as an issue for reauthorization because we still have
another 20 rules to finish, and so I think that we haven't been
able to focus on it like we should.
Mr. Garamendi. Excuse me for interrupting but I try to be
obedient here as with regard to the clock.
Mr. Pearson, how about the view from the European Union on
high-frequency trading?
Mr. Pearson. Thank you for the question, Congressman.
Yes, we have seen the concerns expressed by Mr. Chilton.
Our rules are currently in the making. They are not yet on the
statute book, but the concerns express all the underlying
issues that Mr. Chilton has made. And again there is another
example that we need to work on this together. We need similar
rules in the United States as we would have in the European
Union. It makes no sense to regulate these rules in this
jurisdiction in a slightly different manner than in the
European Union or any other jurisdiction.
Mr. Garamendi. So you are moving forward in the European
Union----
Mr. Pearson. Certainly, we are.
Mr. Garamendi.--to deal with these sets of issues?
Mr. Pearson. We certainly are moving forward.
Mr. Garamendi. And perhaps the volume of the fire hose will
diminish and the Commission can get to it here.
Mr. Pearson. Mr. Chilton drinks from one fire hose; I have
to drink from 27 at the same time, so----
Mr. Garamendi. I yield back my time. Thank you.
Mr. Crawford The gentleman yields back.
Just real quick, Mr. Chilton, high-frequency traders, you
referred to them as cheetahs.
Mr. Chilton. Yes.
Mr. Crawford Can I suggest maybe another name? That really
kind of sounds bad. I know that you are making----
Mr. Chilton. You can suggest it but it is in the lexicon
now I am afraid, Congressman.
Mr. Crawford Yes, that is too bad.
Mr. Chilton. I am not saying cheaters, not like Boston card
cheaters. I am saying cheetahs because they are fast----
Mr. Crawford I understand.
Mr. Chilton.--and scooping up micro dollars in
milliseconds.
Mr. Crawford I get it completely, but I just thought that
might be an unfortunate choice of words, particularly in this
environment, but that is another subject.
The chair recognizes the gentleman from New York, Mr.
Gibson, for 5 minutes.
Mr. Gibson. Well, thanks, Mr. Chairman, and I appreciate
the panelists. It has been an illuminating dialogue here this
morning. And I thought I would take advantage of this
opportunity to perhaps get to a finer point on recommendations,
hearing from Mr. Kono and Mr. Pearson. It certainly has been
encouraging to hear that we share that we want to have more
collaboration, going forward. I am interested in your
recommendation, specifically with regard to process, what
recommendations you have so that we achieve this goal of closer
coordination. Mr. Kono first.
Mr. Kono. Thank you very much for your question.
First, we do have now a group of regulators from the major
markets of OTC derivatives and we have agreed to have regular
meetings and also to coordinate as quickly as possible on all
of the aspects that have been discussed today. On the other
hand, IOSCO, where I am now chairing the Board, can certainly
provide its support to this process, and in the past, IOSCO has
been developing related standards with respect to cooperation
and enforcement. There is what we call an MMOU, a Multilateral
Memorandum of Understanding, which enables regulators to
exchange information when necessary in the course of their
enforcement actions. I think this can be further extended and
we also should have more signatories to this MMOU in all those
respects. So certainly regulators can do better in terms of
making use of such international forums and also working
closely together.
Mr. Pearson. Thank you, sir. I will process three points.
The first is that we actually need to agree that there is a
problem. It doesn't make a lot of sense sitting around the
table if some of or one of the counterparties is in denial and
says there is no problem because either I disagree or I don't
have the time to work through the problem with you.
The second thing is to work through what the problem
actually is, and that means time. This is very, very, very
complex. And if we get it wrong, we will get it horribly wrong.
And we are drafting history here for the global market so we
need the time to work it through and accept that there is a
problem. If there is a problem, there is a solution and that is
a solution that has to work for everybody around the table.
The third point is registration. A delay of the impact of
registration doesn't help. You simply delay the problem but you
don't eliminate the problem. If anybody thinks we can eliminate
the problem of registration within 6 months, I am happy to sign
up to that. But what sense does it make to require firms around
the planet to register if you can't tell them what the
consequences of registration will be and this gamble on solving
this within 6 months. I dearly hope you will be able to solve
it in 6 months but I sure would like to have some up-front
clarity about that for our firms outside of the United States
of America, sir.
Mr. Gibson. I appreciate that. And I would like to hear Mr.
Chilton and Ms. Sommers' reactions specifically to those
points.
Mr. Chilton. Thanks, Congressman.
And let me just restate with a dialogue I was having a
little bit earlier. I am not suggesting that our proposal was
perfect or shouldn't be tweaked in some manner. I am just
saying that I think we will get to it before the end of the
year. So when I was having this conversation about what we can
do, guidance, et cetera, I am not suggesting we shouldn't make
some changes and we are working on that right now on some of
the changes internally. But I don't disagree with Mr. Pearson
at all. I think it makes a lot of sense and I agree with about
everything he says, that it could go horribly wrong if we don't
coordinate. We don't want regulatory arbitrage. That is the big
negative to me of us going too far too fast is that companies
will migrate to nations with the thinnest of rule books, with
less rules. That is not what Dodd-Frank wanted. Congress wanted
to make sure that we protected the U.S. economy from a big
bailout, from systemic risk, to add the transparency. So that
is the main goal. We have to keep our eyes focused on that and
realize that if it is going to take a few more months to get it
right, that is certainly worth the wait.
Mr. Gibson. Okay, so just to make sure I heard you
correctly, with regard to problem, definition, time, and
registration, and notwithstanding earlier comments about
ballpark figures in terms of when you would publish, you feel
it is important to address these points and to get that right
before you publish?
Mr. Chilton. Absolutely, Congressman. Now, when I talk
about guidance, there may be things that we don't anticipate
because we didn't understand this, as Mr. Pearson says, $639
trillion OTC market. We never viewed it. So we are actually
learning things as we go along. So I agree. We should get it
right the first time. I hope we do. We are trying. But the
important point is if we do make a mistake that we can remedy
it. And so I am hopeful we change our proposed exemptive order
in the next couple of weeks, that we provide this relief for
another time certain, perhaps a 6 month time horizon, and then
we work with our colleagues across the world to try to make
sure that we have a global harmonized system of regulatory
regimes.
Ms. Sommers. Thank you, Congressman. I think certainly the
most important part of both what Mr. Pearson and Commissioner
Chilton has said is that we are working together with our
global counterparts. I think we are all very hopeful that we
will come to a mutually agreeable solution but that it is
important that the CFTC in the meantime does not impose our
regulations on those entities until we know how this framework
is going to work out.
Mr. Gibson. I appreciate all that testimony and sorry to go
over, Chairman. I yield back.
Mr. Crawford The gentleman's time has expired.
The chair recognizes the gentleman from Texas, Mr.
Neugebauer, for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman.
Mr. Chilton used a holiday movie, It's a Wonderful Life. As
I am talking to the market participants, particularly in the
swaps area, they think the Grinch has stolen Christmas. And one
of the things Mr. Gensler testified yesterday and one of the
things that was brought out is that over the last couple of
years, we have cautioned you, and some of you mentioned it in
your testimony about making sure that we understand what we are
trying to regulate and what the consequences of that regulation
are and making sure that we don't disrupt these markets. And so
then, if that was the goal, and we look at the swaps market,
for example, right now where ICE has just announced that they
are moving trillions of dollars worth of transactions to the
futures area, the market is telling you something here.
And I also talked to some folks the other day and said they
are having trouble and said some of their customers are
reluctant to trade with them until some of these issues are
worked out, particularly on the registration issue and the
cross-border issue. And so some of the businesses are moving to
foreign countries because they are not sure whether they are
going to be dragged into this regulation, and then they don't
know what the regulation is actually going to be and what the
consequences of dealing with those firms are.
And so one of the things that is a very troubling to me is
that, yes, we talk about, well, we had cost-benefit analyses. I
have seen some of those cost-benefit analyses and they are
marginal at best.
Commissioner Sommers, what should we be doing different
here? I am not sure that we are moving in a direction that is--
I mean the whole original plan, for example, for the
derivatives in the OTC was just to bring transparency. It
appears we have moved pass transparency into we are almost
trying to micromanage those markets. Would you agree with that?
Ms. Sommers. I do. Congressman, I think that one of the
things that we could have done that we chose not to do, we
could have taken the lead of the SEC on these issues in
implementing the Title VII reform in that they are passing
their rules and not requiring compliance until all of the rules
are finished so they can look holistically at how the regime is
going to be set up before they require compliance. And where we
have run into trouble and where we have had to issue dozens of
no-action letters to market participants because they can't
comply is because our rule set isn't finished. In requiring
compliance before we are finished has created problems.
Mr. Neugebauer. And so why aren't we doing that?
Ms. Sommers. That decision was made that we would not do
that and I am not sure why. I would have been supportive of
that.
Mr. Neugebauer. Was that something that was voted on or was
that just----
Ms. Sommers. No, it was not.
Mr. Neugebauer.--unilaterally determined by Mr. Gensler?
Ms. Sommers. It was determined by the Chairman.
Mr. Neugebauer. Yes. And so we are seeing some consequences
of that?
Ms. Sommers. Yes, sir.
Mr. Neugebauer. Mr. Chilton, do you have some response to
that?
Mr. Chilton. Yes, and I hate disagreeing with Members of
Congress, particularly people that I have worked with before
and I really don't like to disagree with my colleague. I think
Congress was pretty clear that it wasn't just transparency,
sir, in the OTC market. Congress wanted us to guard against
systemic risk so that if--look, risk is part of these markets.
Everybody understands that. But if you go down, you shouldn't
take--to risk another analogy--all the Whos in Whoville with
you. I mean we don't want to have another bailout. I think that
is really an important part of Dodd-Frank, not just the
transparency.
Mr. Neugebauer. Well, the thing about the over-the-counter
market was that people didn't quite understand--they felt like
that there could be systemic risk because they weren't quite
sure what kind of space is out there. I am not sure how much of
a systemic risk that that market actually was and I am not sure
that we have done anything that has reduced if it is a systemic
risk at this particular point in time.
But what I do understand is that those are very important
pieces of capital formation in our country and very important
risk management tools, as far as you know, one of the gentlemen
was talking about a while ago about keeping the cost of energy
down for Americans. And if we have these markets who are trying
to move away, market participants not wanting to participate,
then we obviously are doing something that is not positive.
Mr. Chilton. I don't disagree with you on the latter part,
Congressman. I know your time is up so I will be very brief,
but Bear Stearns, Lehman Brothers, those are a direct result of
OTC trading. There wasn't a requirement that they value their
OTC trades with the counterparty. They valued it at whatever
they wanted it. Lehman Brothers in their final statement before
they went down was leveraged 30 to 1. That is the type of
systemic risk stuff that we are trying to address at least.
Mr. Crawford The gentleman's time has expired.
The chair recognizes the gentleman from Kansas, Mr.
Huelskamp, for 5 minutes.
Mr. Huelskamp. Thank you, Mr. Chairman. A lot of Hollywood
themes, Mr. Commissioner, I appreciate that.
I would like to follow up on a related theme. Congressman
McGovern had mentioned the MF Global situation. In your opening
comments you talked about folks in that particular movie that
you referenced, someone is going to serve time in jail. It has
been quite a few months and I have yet to see anything, anybody
really punished, or certainly nobody in jail for the MF Global
situation. And so I wonder if you might indicate what is
happening on that front and we can talk about what happened 4
years ago. I am worried about something that is impacting
constituents in my district yet today.
Ms. Sommers. Congressman, as I said before, our enforcement
investigation is ongoing and we continue to make significant
progress on that case, but I am unable to discuss any of the
specifics of our enforcement investigation.
Mr. Huelskamp. Mr. Gensler is still not participating in
that investigation? What is the latest of his status in there
given his role?
Ms. Sommers. He is not participating in the enforcement
investigation but he is in charge of any type of lessons
learned or our policy changes with regard to customer
protection.
Mr. Huelskamp. And Commissioner, I appreciate the
difficulties or inability to say what is going on there, but
can anyone say when we might have some information? My
constituents see the gentleman--I mean Mr. Corzine, he was
directly responsible and he is still walking around and we
don't know if he is being investigated. Folks haven't been made
whole. I mean we can talk about Lehman Brothers and talk about
that, but clearly, when are we going to find out what is going
on and when are we going to hold someone accountable here?
And I am going to have a follow-up question with Mr.
Pearson because there is a connection apparently with cross-
border with MF Global and I am curious what connection is going
on, what investigations are going on over here. And we are
talking about trying to solve a future problem; I am trying to
make some constituents whole today. They are still waiting. And
to just be able to tell them, well, we don't know yet after a
year. And then maybe Mr. Chilton has some information on that.
Mr. Chilton. Well, I know that it is frustrating when
people don't know and I hate to speak for her but it is
frustrating for us to not be able to explain certain things.
But when these are investigations, they are very difficult for
us to talk publicly. There is always the option, Mr. Chairman,
of calling an executive session and more information could be
provided. I am not suggesting that; if you are really concerned
and you really want to find out more about it, that is one way
that you can find out some more about it that we can't discuss
in public.
Mr. Huelskamp. I appreciate that. And one follow-up on Mr.
McGovern's line of questions as well--I mean waiting for some
proposals--what immediate things were done to prevent that in
the future?
Mr. Chilton. Several things: first, that we are requiring
actual 24/7, 365 electronic access to the bank records instead
of just relying on them telling us it is the case. Second, when
they reach sort of these things that I call liquidity levels--
they are called something more complicated in our rule--but
when they are running low on liquidity, they have to transfer
the customers' funds to another entity. And then finally, the
third point is that if they don't transfer the customer funds
to somebody else, we can mandate that it be done. So those are
three things. There are others, too, Congressman, but those are
the three key things for me.
Mr. Huelskamp. Have they been fully implemented?
Mr. Chilton. No, they are proposals. They are not fully
implemented yet.
Mr. Huelskamp. And do we know when those might be
implemented to provide protections to----
Mr. Chilton. A couple of months, maybe the end of the year
is it? No, next several months, Congressman.
Mr. Huelskamp. Okay. And Mr. Pearson, if I might, what is
happening on your front? I mean do you have these particular
regulations in effect for your traders in the EU and can you
describe how MF Global participates in those or did participate
in that?
Mr. Pearson. The situation is slightly different. We have a
different approach to segregation of client funds and
protection of funds, and that is a different legal approach,
which goes somewhat further than the one that you are
discussing over here. So we acknowledge the issue. We are also
regulating the issue that has already been laid out in European
regulation. We end up in more or less the same space. So we are
absolutely cognizant and we have worked together with the CFTC
very much to test whether our systems are comparable to yours
and whether they are stress-resistant on a cross-border basis.
And I am happy to say that so far that does appear to be the
case.
Mr. Huelskamp. So do you think there are more or less
protections under your regimen versus ours?
Mr. Pearson. It is a different set of protections,
Congressman. The protection is different in that we have a more
direct set of protections and less indirect set of getting
there as you have in the United States of America. The end
result is the same but the way we get there is slightly
different.
Mr. Huelskamp. Okay. Well, thank you, Mr. Pearson. I
appreciate the questions and look forward to actual
implementation of where we are heading. I am actually a little
more nervous than when I started that we have some things out
there in a few months we might fully implement them and I will
have some follow-up questions of what exactly are the risks
that remain in the system then. Thank you. I appreciate it.
I yield back.
Mr. Crawford The gentleman's time has expired.
The chair recognizes the gentlelady from North Carolina,
Mrs. Ellmers, for 5 minutes.
Mrs. Ellmers. Thank you. And it looks like I am probably
the last questioning. And I just want to say thank you, too, to
our panel. I really like this system of bringing everyone
together at the table at the same time so that everyone can
hear the information being exchanged, and I think that is very
helpful for us.
Mr. Kono, I have a question for you. The analogy of risk
spilling over into and onto U.S. shores in times of crisis has
been used a lot recently. And certainly, we want to avoid such
a scenario. How can that scenario be avoided without adopting
an overly strict regime that does not respect the ability of
foreign regulators?
Mr. Kono. Thank you very much for your question,
Congresswoman.
And in fact my point was that certainly we understand those
risks. And in fact if I may mention this, I was at the
frontlines of supervision when the Lehman affair did occur. And
in fact we have basically the same problem still today. We are
still in the course of fixing that in the sense that we do not
have enough flow of information plus enough tools to deal with
such cross-border issues effectively in coordination with
foreign regulators. And once that is established, a close
cooperation, close exchange of information is established, we
will do much better in preventing such risks from flowing from
shore to shore.
Mrs. Ellmers. Thank you, Mr. Kono.
Mr. Pearson, in Chairman Gensler's testimony yesterday, he
stated, ``I think if we do not cover the guaranteed affiliates
offshore that you can basically blow a hole out from the bottom
of Title VII and all of what Congress intended on transparency
and risk.'' It doesn't appear that he has much faith in foreign
governments being able to properly regulate their own
affiliations and jurisdictions. How do you feel about this and
do you see this as being very problematic?
Mr. Pearson. Thank you, Congresswoman Ellmers. We take a
slightly different view on this.
There are a couple of points here and that is it cuts both
ways. If the U.S. affiliate abroad is guaranteed by the U.S.
parent and the U.S. taxpayers, the same applies to our
affiliates here in the United States of America. Why is it that
we do not apply the same approach as proposed by the CFTC? Why
is it that we do not trust the United States' regulators to
regulate our firms here and the U.S. regulators would not trust
the European regulators to regulate your affiliates in Europe?
It is about trust. It is about not understanding the level and
the degree of rules that apply on both sides of the Atlantic.
And as I have tried to explain earlier on, they are actually
very comparable, very consistent, and in a number of cases, our
rules are actually a lot stricter than the United States'
rules.
The next point is how do you enforce this? If the European
Union were to try to enforce its rules on all of its affiliates
in the United States of America, we would be doing two things
that are horribly wrong. We would be trying to enforce
something we cannot enforce in practice; even worse, we would
be giving the impression that we will be able to enforce this.
And if something goes wrong, where will the plane land? Will it
land here in the United States or with a regulator in Europe?
So that is the thing that we are trying to avoid. We do not
afford ourselves a luxury of putting in place a regulatory
system that we know we cannot enforce.
Mrs. Ellmers. Yes. Well, thank you very much. And again,
thank you to the panel.
And I yield back the remainder of my time.
Mr. Crawford Thank you. The gentlelady yields.
And with no further comments from the Ranking Member, I do
have some written testimony to enter into the record with
unanimous consent, written testimony for the record from Mark
Boleat from the City of London, and written testimony for the
record from Steven Maijoor, Chairman of ESMA.
Without objection, so ordered.
[The information referred to is located on p. 49.]
Mr. Crawford And we also have letters for the record. These
were letters written to Chairman Gensler and CFTC, letters from
the chief financial administrators from UK, France, Japan, and
European Union, a letter from the Swiss regulator FINMA, a
letter from Hong Kong Secretary of the Treasury, a letter from
French financial regulators, a letter from British FSA, a
letter from the FSA of Japan, and the Bank of Japan, a letter
from the European Securities and Market Authority, a letter
from the European Commission, a letter from the Brazilian CVM,
and a joint letter from the Asian regulators from Hong Kong,
Singapore, and Australia.
Without objection, so ordered.
[The information referred to is located on p. 52.]
Mr. Crawford Under the rules of the Committee, the record
of today's hearing will remain open for 10 calendar days to
receive additional, material, and supplementary written
responses from the witnesses to any question posed by a Member.
I thank the participants for being here today.
This hearing of the Subcommittee on General Farm
Commodities and Risk Management is adjourned.
[Whereupon, at 10:55 a.m., the Subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Submitted Statement by Hon. Eric A. ``Rick'' Crawford, a Representative
in Congress from Arkansas; on Behalf of Steven Maijoor, Chair, European
Securities and Markets Authority
Dear Chairman Conaway, Ranking Member Boswell, and Members of the
Committee,
I would like to thank you on behalf of ESMA for your invitation to
testify before this Committee on the important topic of derivatives
reform. Unfortunately, due to other urgent obligations I am unable to
be physically present at today's hearing. ESMA is submitting this
statement to highlight, in particular, some issues in relation to the
application of the Dodd-Frank Act to non-U.S. persons. I know that the
European Commission, with which we have worked very closely in this
process, is attending the hearing and will be able to expand on some of
these points.
I will now briefly introduce ESMA to you. As an independent agency
of the European Union (EU) our mission is to enhance the protection of
investors and reinforce stable and well-functioning financial markets
in the EU. ESMA achieves this mission by building the single rule book
for EU financial markets and ensuring its consistent application and
supervision across the EU. ESMA also contributes to the supervision of
financial services firms with a pan-European reach, either through
direct supervision or through the active coordination of national
supervisory activity.
ESMA is deeply committed to finding convergent regulatory solutions
to ensure there is an internationally coordinated application of the
G20 commitments. The Dodd-Frank Act in the United States and the EMIR
Regulation in the EU have many similarities, and both regimes are
broadly aligned on many substantial points. However, there are some
differences that require joint action and mutual understanding by
regulators, like the CFTC and ESMA, which are tasked with drafting the
secondary regulation that will allow the implementation of the
respective Act and Regulation.
One of the differences between our respective regulatory frameworks
relates to the registration of foreign entities, such as swap dealers
(when they fall above the relevant threshold), which is required under
U.S. rules but not under EU rules. This registration requirement will
apply to entities that are already authorised as dealers (investment
firms or banks) under EU rules, and the U.S. regime will therefore
apply to entities and transactions that are also subject to EU rules.
As the two sets of rules are similar in substance, there is a clear
case for avoiding the situation where a particular entity or
transaction is simultaneously subject to two sets of rules. The
application of two sets of rules to a single entity or transaction will
lead to legal uncertainty and will be unnecessarily burdensome for
firms.
The main relevant international regulators have been working
together to seek ways to achieve convergence on the application of the
rules that legislators in our respective jurisdictions enacted to
reform OTC derivatives markets. ESMA has cooperated with its peers in
other jurisdictions and found many points in common, including with the
CFTC. As highlighted in the statement issued by the OTC Derivatives
Market Regulators following their meeting on 28 November, a number of
conflicting, duplicative and inconsistent requirements have been
identified when analysing the simultaneous application of different
national regulations. These requirements, if applied on a cross-border
basis to the same entities and transactions, would, in certain cases,
impede a transaction from taking place or might impede an entity from
operating with U.S. counterparties. This would have serious
consequences for global market liquidity and might even have financial
stability consequences.
These conflicting and duplicative requirements are, amongst others:
(1) different applications of the clearing obligation;
(2) different bilateral margin requirements;
(3) privacy and data protection constraints;
(4) different scope and exemptions (non-financial counterparties,
inter-affiliates, pension funds, small banks, etc.);
(5) different requirements for CCPs and trade repositories; and
(6) indemnification requirements in the U.S.
The group of international OTC Derivatives Market Regulators
reached some common understanding of the problems that these
conflicting and duplicative requirements may give rise to. They have
also agreed to carry out further work to identify mutually acceptable
solutions to address these problems, but more work is needed.
ESMA considers that it is of fundamental importance to avoid the
application of two or more sets of rules to the same entities or
transactions, if those entities and transactions are subject to
appropriate requirements in their home jurisdiction. Therefore, we
would urge U.S. regulators to rely to the maximum extent on equivalent
requirements enshrined in EU law, instead of imposing U.S. requirements
when those non-U.S. entities are dealing with U.S. persons. When a
duplicative application of rules cannot be avoided, we believe it is
essential to identify and mitigate any possible conflict that might
arise from that situation.
ESMA has welcomed as a workable solution, the use of mechanisms
like ``substituted compliance'', which would allow U.S.-registered
foreign swap dealers to apply their home jurisdiction rules, to the
extent that they are producing the same result as the corresponding
U.S. rules. However, while this is moving in the right direction, we
remain concerned about the fact that in its current version it would
not be applicable to transactions in which one of the counterparties is
a person established or domiciled in the U.S. We remain confident that,
through common work, we will reach an agreement to allow the maximum
possible use of mutual recognition and substituted compliance as ways
to minimise conflicts and overlaps between different sets of laws.
Pending any such agreement, and until a framework for dealing with
the above issues is finalised, we are of the view that registration and
other requirements should be suspended for foreign entities. In this
vein, ESMA would like to express its strong concerns about maintaining
the deadline for the registration of foreign swap dealers by the end of
2012, despite a possible temporary waiver from some related
obligations. This is due to the three reasons outlined below.
Firstly, the registration requirement that EU swap dealers face is
required at a stage when several associated rules that they will have
to comply with in the future are not yet final. In addition,
international coordination efforts are still under development and
subject to the dialogue between international OTC Derivatives Market
regulators. Therefore, foreign swap dealers would be required to
register without knowing with sufficient certainty the complete set of
rules that will bind them as a consequence of their registration, and
how those rules will be applied in an international context--including
how substituted compliance will work.
Secondly, ESMA remains concerned about the fact that the
registration application grants access to the U.S. supervisors and the
U.S. Department of Justice to the books and records of registered swap
dealers. It is important to reconcile this with the privacy or blocking
laws that in many jurisdictions restrict the type of data that banks
and investment firms can share with anyone except their national
supervisors with a statutory power to require those data.
Thirdly, while we have achieved some progress on reaching an agreed
approach to resolving cross-border issues, our international dialogue
has not yet been exhausted and, therefore, fixing the registration
requirement ahead of the conclusion of that dialogue could undermine
the above-mentioned cooperation process.
I would like to thank you again for the opportunity to submit
ESMA's views on this important matter to your Committee.
Yours sincerely,
Steven Maijoor,
Chair,
European Securities and Markets Authority.
______
Submitted Statement by Hon. Eric A. ``Rick'' Crawford, a Representative
in Congress from Arkansas; on Behalf of Mark Boleat, Chairman, Policy
and Resources Committee, City of London
Chairman Conway, Ranking Member Boswell, and Members of the
Subcommittee:
Thank you for inviting me to testify before you today, I welcome
this opportunity and apologise that I cannot be there with you to
attend this hearing in person. In my absence, I have prepared the
following testimony, which outlines my views on the topic of ``Dodd-
Frank Derivatives Reform: Challenges Facing U.S. and International
Markets''.
I am Policy Chairman at the City of London Corporation, which is
the local government authority for the City of London. In the role of
Policy Chairman, I am responsible for overseeing and coordinating the
agenda of the City of London and this includes a remit for strategy,
resource allocation and engagement with legislators and regulators in
the UK, Europe and across the world on policy issues affecting London
as a global financial centre.
In my written testimony I would like to focus on three key
challenges that I see facing U.S. and international markets because of
Dodd-Frank derivatives reform and explain what action I think could be
taken in order to resolve these challenges.
I appreciate this Subcommittee's attention on the international
dimension at this hearing because the past few years have demonstrated
both the highly global nature of the financial markets and the need,
where possible, to find international solutions especially through the
G20. I support the efforts of the U.S. regulatory agencies to provide
transparency and lower risk through increased clearing and swap dealer
oversight but I have particular concerns regarding the extraterritorial
application of some of the rules that form part of Dodd-Frank
derivatives reform and the implications for the U.S. and international
markets. I also strongly welcome the recent joint press statement of
leaders on Operating Principles and Areas of Exploration in the
Regulation of the Cross-Border OTC Derivatives Market \1\ and their
identification of the areas that would be further explored in order to
address the concerns that have been raised around extraterritorial
requirements. However, I fear that given the scope of what is to be
explored and the timescales for implementation and the difficulty
inherent in jurisdictions moving at different speeds, much more needs
to be done to better coordinate international regulatory regimes.
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\1\ http://www.cftc.gov/PressRoom/PressReleases/pr6439-12.
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In my consideration of challenges facing the U.S. and international
markets, I will firstly discuss conflicting, inconsistent and
duplicative rules. Secondly, I will explain my concerns about the gaps
in guidance and clarification that need to be addressed given the
sequencing and timing of Dodd-Frank derivatives reform. Thirdly and
finally, I will discuss the need for consistent margin requirements
across G20 regimes. On all of these issues, I will outline the problem
facing U.S. and international markets, the potential impact and what
could be done to address these problems.
1. The Challenge of Conflicting, Inconsistent and Duplicative Rules
I am concerned that under Dodd-Frank derivatives reform, cross-
border transactions could be subject to duplicative, inconsistent and
even conflicting rules. The proposed cross-border guidance from the
Commodity Futures Trading Commission (CFTC) does not guarantee
``substitute compliance'' for countries with equivalent regulatory
regimes and instead allows the CFTC to determine which elements of a
foreign jurisdiction's regulatory regime it will recognise.
Having two sets of rules to comply with could increase compliance
costs for the entities registered with the CFTC as swaps dealers,
including non-U.S. branches and foreign subsidiaries of U.S. banks as
well as foreign dealers, and end-users. Many end-users, whether based
in the UK, U.S. or elsewhere, have operations in multiple
jurisdictions, through numerous affiliates. These companies often
manage risks arising from their foreign operations by executing hedges
out of foreign subsidiaries, as part of their overall efforts to manage
the risks inherent in their global commercial and business operations.
Their ability to do so effectively and efficiently improves their
ability to plan for the future, reduce volatility in their business,
and offer more stable prices to their customers. It facilitates the
flow of goods and services in a global economy, and enhances their role
as drivers of economic growth and job creation in communities across
the globe.
Failure to address inconsistent, duplicative or conflicting
requirements for cross-border transactions could create strong
disincentives for both non-U.S. end-users to trade with U.S.
counterparties, or for non-U.S. dealers to trade with U.S. end-users.
Having a smaller pool of potential counterparties could reduce
liquidity and the efficient pricing that having wide selection of
counterparties provides. At the same time, a reduced pool of
counterparties may inhibit an end-user's ability to diversify its
exposures to counterparties, increasing the concentration of exposure,
for example, to counterparties in certain regions.
I would therefore ask that these inconsistent, duplicative or
conflicting rules for cross-border transactions are resolved with
``substitute compliance'' (allowing them to be referred to the home
regulator) to ensure that international regulatory regimes are more
closely aligned. Further clarification around the broad definition of a
U.S. person would also help address some of the duplication.
2. The Challenge of Gaps in Guidance and Clarification Given the
Sequencing and Timing of Dodd-Frank Derivatives Reform
In terms of the sequencing and timing of Dodd-Frank derivatives
reform, important elements remain unclear and there are areas where
insufficient clarification and guidance on cross-border rules has been
provided, given the impending implementation timeline. The finalised
cross-border guidance is yet to be released, causing uncertainty for
non-U.S. entities over the need to register as a swap dealer, the
designation of Commodity Pool Operators as well as the aforementioned
scope of ``substitute compliance''.
The lack of clarity and guidance on these issues is causing
considerable uncertainty in U.S. and international markets. This could
result in a shift in transactions, particularly from the U.S. to other
markets, as firms attempt to comply with the regulations being
implemented despite the uncertainty and it could reduce global
liquidity. It has also caused confusion as to whether the cross-border
rules within Dodd-Frank derivatives reform will be consistent with
other national regulatory regimes.
In order to address this problem, more guidance and clarification
is of course needed, but a sufficient transition period should also be
given so that parties have adequate time to comply with regulations. I
believe that the application of CFTC rules with respect to non-U.S.
persons should also be deferred to allow for better alignment with
other national regulatory regimes and the potential for regulatory
arbitrage.
3. The Challenge of Implementing Consistent Margin Requirements Across
G20 Regimes
The final challenge I would like to highlight to the Subcommittee
is the need for consistent margin requirements across G20 regulatory
regimes. The inconsistencies between proposed margin requirements in
the U.S. and the EU are of particular concern in this regard.
As they stand, the proposed margin requirements under Dodd-Frank
derivatives reform could result in an unlevel playing field between
U.S. and European banks and possible regulatory arbitrage. The
different requirements would also be difficult to apply cross-border
and significant differences in collateral requirements among regulatory
regimes would undermine G20 objectives to have consistent global
standards for these margin requirements.
I would therefore call on regulators to work together further on
consistency. Even if convergence between the EU and the U.S. regulatory
schemes on this issue is not possible in the near term, equal treatment
within each scheme should be sought.
In summary, I ask the Subcommittee to consider my concerns about
firstly, duplicative, incompatible or conflicting requirements;
secondly, regulatory uncertainty caused by lack of sufficient
clarification and guidance; and thirdly, inconsistencies in proposed
margin requirements. Fragmented or conflicting regulation, even when
the policy objectives are the same, would have a negative impact on
competition and consumer choice and on the ability of market users and
participants to raise capital, manage risk and contribute to economic
growth. We should work collectively to avoid the risk of impeding or
disrupting the efficient functioning of our global financial markets as
a result of regulatory fragmentation, which would be to the detriment
of consumers, investors and other market participants. I would also
urge the authorities involved to strengthen international regulatory
dialogue and cooperation further to ensure a consistent approach that
meets the needs of market users, without major unintended consequences,
and avoids unilateral action by either side, or both.
Thank you again for this opportunity to submit a testimony to this
hearing. I appreciate the Subcommittee's attention to these issues and
remain at your disposal to discuss them in further detail should you
wish to follow up on them.
Yours sincerely,
Mark Boleat,
Chairman of the Policy and Resources Committee.
______
Submitted Correspondence by Hon. Eric A. ``Rick'' Crawford, a
Representative in Congress from Arkansas
16 July 2012
Hon. Gary Gensler,
Chairman,
Commodity Futures Trading Commission,
Washington, D.C.
Swap Dealers Registration under Dodd-Frank Act
Dear Chairman Gensler,
We are writing to express our concerns about the potential
extraterritorial effects of registration rules for swap dealers.
We understand that the implementation of Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of July 2010
requires substantial rulemaking and have followed the related
regulatory developments with interest. We share the view that closer
monitoring of the derivatives business may, contribute to higher market
confidence and mitigate systemic risks in highly interconnected
markets. As regards the CFTC regulations, it is our understanding that
the final rules adopted so far only address registration issues, while
details of specific requirements remain pending.
According to our information, registration with the CFTC is
required by September, probably before the exact reach and scope of the
U.S. swap dealer regulatory regime will have been clarified. The CFTC
released a Proposed Interpretive Guidance and Policy Statement on 29
June 2012 for public consultation to address--among other issues--the
cross-border application of U.S. swap dealer requirements. The
principle of substituted compliance may thereby only be recognized for
certain entity level requirements of non-U.S. swap dealers and if the
CFTC concludes that the foreign jurisdiction's laws and regulations are
comparably robust and comprehensive. Beyond that the demand for direct
extraterritorial access to transaction data and books and records as
well as to entity level information on capital, compliance, risk
management is not addressed in the guidance. The potential
extraterritorial reach of the requirements still remains unclear to us.
Hence, for the time being, we are not in a position to fully assess the
consequences of a registration with the CFTC and whether these can be
reconciled with Swiss regulatory standards, domestic laws, and
supervisory practice. Nonetheless, we have serious doubts as to whether
the registration as a swap dealer of a Switzerland-domiciled bank as a
whole can be reconciled with Swiss practice.
We are particularly concerned about potential CFTC margin
requirements for swap deals that are not cleared by a central
counterparty. If such margin requirements are applied to a Swiss-based
entity, this may duplicate the requirements and may possibly conflict
with international and domestic capital adequacy rules, thereby leading
to prudential inefficiencies. Furthermore, certain of the proposed
reporting requirements, in particular those regarding trade data and
end-customer data, and access requirements may raise Swiss privacy and
data protection issues as well as enforcement difficulties. Due to
these concerns, we cannot exclude that FINMA may have to deny financial
institutions permission to supply certain information or grant direct
access to U.S. supervisors.
We are conscious that UBS and Credit Suisse are planning to
register as swap dealers with the CFTC. In this context, the
registration of UBS's swap business may be particularly challenging.
Contrary to other swap market participants, UBS does not book its
derivative transactions through foreign affiliates of the group, but
carries these out largely through a branch network. Most of the
derivatives traded with U.S. counterparties are currently booked in the
UBS London or Stamford branches. The bank is currently working on
shifting its derivatives business to a standalone legal entity (UBS
Limited London). This process is expected to take several years.
Based on our current understanding, we are not comfortable with the
idea of a Swiss-based bank as a whole registering with the National
Futures Association (NFA) and the CFTC while the extraterritorial
effects of the registration remain unclear.
We are confident, however, that viable alternatives which comply
with both of our prudential mandates can be found. Such alternatives
could include the provisional registration of those foreign branches of
Swiss-based banks in which swap transactions with U.S. persons are
booked until a separate legal entity has been set up, or the
registration of a U.S. incorporated entity acting as information
transfer agent for the bank.
We thank you for your consideration and look forward to discussing
these issues with you in more detail. Our office will contact you to
schedule a telephone call.
Yours sincerely,
Patrick Raaflaub, Mark Branson,
Chief Executive Officer, Head of Banks Division,
Swiss Financial Market Supervisory Swiss Financial Market Supervisory
Authority FINMA; Authority FINMA.
CC:
Hon. Mary Schapiro, Chairperson, Securities and Exchange Commission.
______
27 July 2012
Hon. Gary Gensler,
Chairman,
Commodity Futures Trading Commission,
Washington, D.C.
Subject: CFTC International Guidance and phased compliance program
Dear Chairman,
As Minister of Economy and Finance and as Chairmen of the Autorite
de controle prudentiel (``ACP'') and the Autorite des marches
financiers (``AMF''), we are writing to share our strong concerns
regarding extraterritorial effects of the cross-border application of
the swaps provisions of Title VII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (``Dodd-Frank Act'').
This issue was raised last month in an open Letter published by
Michel Barnier, the EU Commissioner in charge of the Internal Market
and Services.\1\ In February 2011, we also drew your attention as
regards to credit institutions located in France that may have to
register as Swap dealers or, from case to case, as Major Swap
Participants, in the U.S.\2\
---------------------------------------------------------------------------
\1\ See Financial Times, 21 June 2012.
\2\ See Annnex I.
---------------------------------------------------------------------------
In such a context, we welcome the CFTC's initiative aiming at
defining through an Interpretative Guidance, the scope and the
boundaries of the U.S. legislation in a cross-border context, as well
as the proposal for a phased compliance program. In particular, we
support the concept of ``substituted compliance'' related to non-U.S.
Swap Dealers or non-U.S. Major Swap Participants. We are firmly
convinced that the equivalence system is the best way to prevent
overlaps and to achieve an efficient regulation and oversight of OTC
de1ivatives markets. Other upcoming European financial regulations
propose to adopt a similar cross-border equivalence approach. As
fertile as such the concept of ``substituted compliance'' may be, based
on the EU legislation (EMIR) \3\ and from a very practical point of
view, we wish to emphasise that any entity-by-entity approach should be
articulated with and complemented by the assessment, in a comprehensive
perspective, of the rules applicable on both sides of the Atlantic.
Indeed, such general approach, combined with an appropriate temporary
exemptive relief (particularly for transactions between a non-U.S. and
a U.S. entity and provided for an extended period of time), should
facilitate the processing of the files (and reduce the costs for the
firms) and avoid any distortion or discrepancies between the entities
located in the same jurisdiction (i.e., EU or EEA).
---------------------------------------------------------------------------
\3\ See Annex II.
---------------------------------------------------------------------------
Generally speaking, the mere extension of the scope of registration
for Swap Dealers or Major Swap Participants to non-U.S. entities would
create regulatory and oversight overlaps which cause serious concerns
for us and our industry.
In addition, we would like to point out the main legal impediments
we will face, namely the professional secrecy rules and the protection
of strategic data (``Blocking Law'') which may prevent French entities
from freely displaying information you may request (such concern should
dully be considered, in particular, regarding Form 7-R). Similarly, you
must consider clarifying the scope of the activities which would be
concerned by the application of the Volcker rule in order to prevent
significant extraterritorial consequences for the non-resident banking
entities (i.e., functional and/or structural reorganization) that could
induce unexpected impact for both U.S. and EU economies.
Furthermore, we understand that the financial statements of EU Swap
Dealers and Major Swap Participants which are prepared under IFRS,
should be reconciled under U.S. GAAP. Such requirements would be
contrary to the process of reconciliation initiated a few years ago
between the U.S. and the EU accounting standards and inconsistent with
mutual recognition commitments already taken on both sides of the
Atlantic.\4\
---------------------------------------------------------------------------
\4\ Since 15 November 2007, the SEC has decided to remove the
requirement for non-U.S. companies reporting under International
Financial Reporting Standards (IFRSs) as issued by the IASB to
reconcile their financial statements to U.S. Generally Accepted
Accounting Principles (GAAP). In the same way, since December 2008, the
European Commission has identified as equivalent to IFRS the U.S. GAAPs
for listed companies.
---------------------------------------------------------------------------
Finally, we consider that the specific issue related to the cross-
border transactions should also be explicitly covered in the
interpretative guidance, especially when such transactions occur
between an EU and a U.S. counterparty: according to the recognition of
equivalence and, if appropriate, following the substituted compliance
decision, authorities should be able to rely on each other, regardless
of the type of rules concerned. Given the importance of these
requirements for market participants, we would also strongly encourage
you to adopt a strict and objective definition of the concept of ``U.S.
person'' without criteria that would be excessively subtle and
difficult to implement and that could finally undermine the
effectiveness of our common action to regulate OTC derivatives.
We believe our objectives are the same and are fully convinced that
we will succeed in building a sound and coherent global framework
leading to improve the transparency, the efficiency and the robustness
of the OTC derivatives market, in accordance with the G20 commitments
and based upon a sound transatlantic level playing field. We are aware
of the current efforts undertaken by U.S. authorities and are
supportive on pursuing a constructive dialogue between our respective
institutions.
Yours sincerely,
Pierre Moscovici, Christian Noyer, Jacques Delmas-
Marsalet,
Minister, Chairman, Interim Chairman,
Ministere de l'economic Autorite de controle Autorite des marches
et des finances; prud-entiel (ACP) financiers (AMF)
CC:
Mrs. Mary L. Schapiro, Chairman of the Securities and Exchange
Commission.
Mr. Timothy Geithner, Secretary of the Treasury.
ANNEX I: JOINT LETTER FROM THE ACP AND THE AMF RELATED TO TITLE VII OF
THE DODD-FRANK ACT OF 11 FEBRUARY 2011
11 February 2011
Hon. Gary Gensler,
Chairman,
Commodity Futures Trading Commission,
Washington, D.C.
Re: Title VII of the Dodd-Frank Act
Dear Chairman,
As Chairmen of the Autorite de controle prudentiel (``ACP'') and of
the Autorite des marches financiers (``AMF'') we take the opportunity
of the public consultation on your proposed rulemaking to raise
specific concerns on the proposed rules related to Section 712(d)(1),
Section 721(c) and Section 761(b) of Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act'').
Although this is not a formal contribution to your consultations we
would like to draw your attention specifically to the case of foreign-
headquartered financial organizations and in particular French
entities.
We understand that the CFTC and the SEC, in consultation with the
Board of Governors of the Federal Reserve System (``Fed''), are
proposing rules and interpretative guidance to further define the terms
``swap dealer,'' ``security-based swap dealer,'' ``major swap
participant,'' ``major security-based swap participant,'' and
``eligible contract participant'' which would not specifically take
into account the case of the non-resident entities and, therefore,
could have non-desirable extraterritorial effects on such entities.
Based on our common experience, especially in a cross-border
prudential supervision and market regulation perspective, we believe
that such unilateral approach could lead to regulatory overlaps and
inconsistencies and therefore be counterproductive. Indeed, the
articulation between the different legal and regulatory frameworks is
an international challenge and is undoubtedly a corner stone for the
achievement of G20's commitments.
Therefore, from a practical point of view, we strongly support for
foreign banking organizations and other financial institutions (such as
asset management companies, investment advisers, private equity funds
and other entities that might qualify as major swap participants) a
mutual recognition regime built around an adequate and balanced
symmetrical system taking into account the home and the host country
regulatory regimes. Thus, without calling into question the
registration of nonresident entities as ``swap dealer'', ``security-
based swap dealer'', ``major swap participant'' or ``major security-
based swap participant'', we expect that such registration will be
limited to activities in relation with U.S. counterparties and/or
clients and will not involve similar obligations to the financial
organizations as a whole. The obligations for non-resident entities
should indeed be proportionate and take into equivalent requirements in
their home jurisdiction. In this perspective, in order to prevent
double and recursive regulation, Memoranda of Understanding (MOUs)
signed between the regulatory authorities concerned could be very
useful instruments. Having regard to Section 752 of Title VII of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, we
understand that such an approach could be relevant.
Consequently, taking into consideration the short timeframe of the
proposed rulemakings, we would be happy to explore with you various
options in a constructive approach and we would be pleased to further
discuss on this very important subject.
We look forward to our continued co-operation in this field.
With our best regards,
Christian Noyer, Jean-Pierre Jouyet,
Chairman, Chairman,
Autorite de controle prudentiel Autorite des marches financiers
(ACP) (AMF)
CC:
Mrs. Mary L. Schapiro, Chairman of the Securities and Exchange
Commission.
Mr. William Dudley, Chairman of the Federal Reserve Bank of New York
ANNEX II: ARTICLE 13 OF EMIR--MECHANISM TO AVOID DUPLICATIVE OR
CONFLICTING RULES
1. The Commission shall be assisted by ESMA in monitoring and
preparing reports to the European Parliament and to the Council on the
international application of principles laid clown in Articles 4
[clearing obligation], 9 [reporting obligation], 10 [non-financial
counterparties] and 11 [Risk-mitigation techniques for OTC derivative
contracts not cleared by a CCP], in particular with regard to potential
duplicative or conflicting requirements on market participants, and
recommend possible action.
2. The Commission may adopt implementing acts declaring that the
legal, supervisory and enforcement arrangements of a third country:
(a) are equivalent to the requirements laid down in this regulation
under Articles 4, 9, 10 and 11;
(b) ensure protection of professional secrecy that is equivalent to
that set out in this Regulation; and
(c) are being effectively applied and enforced in an equitable and
non-distortive manner so as to ensure effective supervision and
enforcement in that third country.
Those implementing acts shall be adopted in accordance with the
examination procedure referred to in Article 86(2).
3. An implementing act on equivalence as referred to in paragraph 2
shall imply that counterparties entering into a transaction subject to
this Regulation shall be deemed to have fulfilled the obligations
contained in Articles 4, 9, 10 and 11 where at least one of the
counterparties is established in that third country.
4. The Commission shall, in cooperation with ESMA, monitor the
effective implementation by third countries, for which an implementing
act on equivalence has been adopted, of the requirements equivalent to
those laid down in Articles 4, 9, 10 and 11 and regularly report, at
least on an annual basis, to the European Parliament and the Council.
Where the report reveals an insufficient or inconsistent application of
the equivalent requirements by third country authorities, the
Commission shall, within 30 calendar days of the presentation of the
report, withdraw the recognition as equivalent of the third country
legal framework in question. Where an implementing act on equivalence
is withdrawn, counterparties shall automatically be subject again to
all requirements laid down in this Regulation''.
______
August 13, 2012
Hon. Gary Gensler,
Chairman,
Commodity Futures Trading Commission,
Washington, D.C.
Re: Proposed CFTC Cross-Border Releases on Swap Regulations
Dear Gary,
We appreciate the opportunity to comment on the proposed CFTC
cross-border interpretative guidance and exemptive order regarding
compliance with certain swap regulations. We are writing to ask the
Commission's consideration of our concerns about these proposals, in
particular about the application of registration and transaction
requirements to operations of foreign financial institutions
established outside the U.S.
As to the extraterritorial application of OTC derivatives
regulation of the Dodd-Frank Act, we can understand your concern that
risks emanating from an overseas entity of a financial group could
directly flow back to the whole group, and this should be avoided. We
believe, however, that such extraterritorial application will need to
be consistent with the principles of international comity between
jurisdictions, as noted in the CFTC proposal. A number of
jurisdictions, including Japan, have been making significant progress
in implementing the G20 commitments, including mandatory clearing and
trade reporting, in an internationally consistent and coordinated
manner toward the agreed deadline of end-2012. The regulations which
Japan will be implementing from November this year are not identical
with U.S. regulations, but are consistent with the objectives of the
G20 countries to improve transparency in the derivatives markets,
mitigate systemic risk and protect against market abuse, and in this
regard share the same goals with the Dodd-Frank Act.
Against this backdrop, we have two overarching concerns and three
specific requests to amend the CFTC proposals as follows.
I. Overarching Concerns
Avoidance of Overlapping or Conflicting Regulation
First, to the extent that U.S. law subjects Japanese financial
institutions established and conducting businesses in Japan to U.S.
regulation, then this would inevitably lead to overlapping or
conflicting regulation, thus placing undue burden not only on the
financial institution itself but also on other market participants as
well.
In this regard, FSA Japan has the primary responsibility in
determining and implementing appropriate regulation of OTC derivatives
market participants and their transactions in Japan. Therefore, we
would like to ask the Commission to reconsider the necessity of
extraterritorial application of U.S. derivative regulations, including
swap dealer registration requirements to Japanese financial
institutions established and conducting businesses in Japan.
Need for International Coordination in Cross-Border Regulation
Second, if the scope and timing of application of OTC derivatives
regulations to cross-border transactions would be different and
inconsistent among jurisdictions, there are risks that the application
of a country's regulations to cross-border transactions without proper
international coordination would unduly impose additional costs on
those transactions and thereby reduce the liquidity of OTC derivatives
markets. For example, where the scope of mandatory clearing in terms of
products is not identical between jurisdictions and no single CCP is
available for clearing the transactions of both counterparties, market
participants will not be able to enter into a transaction for fear of
finding themselves in breach of either of the two sets of regulations.
In this context, FSA Japan intends to address this issue by limiting
the scope of mandatory clearing to transactions between large domestic
market players at the initial stage of implementation of OTC derivative
regulations to enter into force in November this year.
Therefore, we urge the Commission to consider deferring the
application of its regulations on cross-border transactions until an
internationally consistent approach on how to address cross-border
regulation of OTC derivatives would be developed (e.g., for at least 1
year and renewable, if necessary).
II. Specific Requests
In addition to the overarching concerns above, we have the
following three specific requests to amend the CFTC proposals:
1. Further extension of application of substituted compliance, and
making clear its details, including due process and timing
2. Deferral of application of CFTC regulations with respect to non-
U.S. persons
3. Exclusion of certain transactions from the calculation of swap
transactions in regard to the de minimis threshold for non-U.S.
persons
1. Further Extension of Application of Substituted Compliance, and
Making Clear Its Details, Including Due Process and Timing
In the proposed CFTC guidance, we recognize that the Commission
intends to introduce the concept of substituted compliance for the
purpose of avoiding duplicative application of regulation. While we
welcome this step, we have two concerns in this regard.
(i) The first concern is that the scope of application of
substituted compliance is too narrow. We request it to be
further extended, so that overlap or conflict with Japanese
regulation could be avoided as much as possible.
As for entity-level regulations, substituted compliance should
apply to all types of foreign affiliates of U.S.-based swap
dealers, including those with swaps booked in the U.S.
Substituted compliance should also be extended to a broader set
of transaction-level requirements. For example, transactions
conducted in Japan between Japanese financial institutions and
Japanese affiliates of U.S.-based swap dealers (swaps booked in
the U.S.) should be subject to substituted compliance. In
addition, cross-border transactions between the head offices of
Japanese financial institutions and U.S.-based swap dealers
should be able to benefit from substituted compliance.
(ii) The second concern is that the details, including the
procedure and implementation timeline of ``substituted
compliance'' are not clear in the proposal. The Commission
proposes that it would make comparability determinations on an
individual requirement basis, such as mandatory clearing and
trade execution facility, rather than the foreign legislative/
regulatory regime as a whole. We believe this determination
should be made on a country-by-country basis, and in a
comprehensive manner, from the viewpoint of whether or not
foreign regulation is broadly in alignment with U.S. regulation
and consistent with the overall objectives of the G20
commitments. The determination should also take into account
such elements as further regulations to be introduced in a
phased manner and the necessity of different regulation in
light of divergent practices in non-U.S. markets.
Furthermore, when certain requirements under Japanese regulations
are not identical to those of the U.S. at a particular point in
time, it would not be acceptable for us that the Commission
applies its regulations in addition to Japanese regulations in
place to address the differences. In other words, substituted
compliance should respect foreign regulations as a set, not on
a piecemeal basis.
2. Deferral of Application of CFTC Regulations With Respect to Non-U.S.
Persons
As noted above, we believe that CFTC regulations, including swap
dealer registration should, as a matter of principle, not be applied to
Japanese financial institutions established and conducting businesses
in Japan. Even if Japanese financial institutions would be required to
register as swap dealers under limited circumstances, these
requirements should be the least onerous, and a sufficient preparation
period needs to be ensured.
In this regard, according to the CFTC rule, the application for
registration as swap dealer will need to be filed within 60 days after
the final rule on the definition of swaps is published in the U.S.
Federal Register. Although this deadline is applied to non-U.S.
persons, as well as U.S. persons, we request that the swap dealer
registration requirement (along with other obligations that
registration entails) should not apply to non-U.S. persons before (i)
the details, including the procedure and implementation timeline of
substituted compliance become clear, and (ii) the assessment by the
Commission for substituted compliance is completed and agreed with
interested parties.
3. Exclusion of Certain Transactions From the Calculation of Swap
Transactions in Regard to the De Minimis Threshold for Non-U.S.
Persons
Third, the following types of swap transactions should be excluded
from the calculation of swap transactions in regard to the de minimis
threshold in determining the need for swap dealer registration for non-
U.S. persons, if non-U.S. persons are required to register under
limited circumstances.
(i) Transactions between non-U.S. affiliates of non-U.S. persons
under common control and U.S. persons
We believe that only transactions with U.S. persons conducted by
Japanese financial institutions established in Japan should be
included in determining the need for registration as swap
dealer. In other words, transactions with U.S. persons
conducted by entities under common control of Japanese
financial institutions established outside Japan (e.g., in the
UK and Hong Kong) should not be included in the calculation of
swap transactions in regard to the de minimis threshold, with
respect to the Japanese financial institutions established in
Japan.
Furthermore, even if Japanese financial institutions are to be
registered as swap dealers, their subsidiaries, sister
companies or parent companies which conduct transactions with
U.S. persons below the de minimis threshold should not be
required to register as swap dealers.
(ii) Transactions between U.S. branches of non-U.S. persons and
U.S. persons
According to the proposed guidance, we understand Japanese
financial institutions established in Japan do not need to
include the notional value of swap transactions with U.S.
persons in which their U.S. affiliates engage, when calculating
the swap transactions in regard to the de minimis threshold. In
parallel with this, we believe that transactions between U.S.
branches of Japanese financial institutions and U.S. persons
should also be excluded from the de minimis threshold
calculation for Japanese financial institutions.
We would Like to kindly request that the Commission take into
account the above and amend the proposed guidance and order in
accordance with our requests. Should you have any questions concerning
the above, please do not hesitate to contact us.
Sincerely yours,
Masamichi Kono,
Vice Commissioner for International Affairs,
Financial Services Agency,
Government of Japan;
Hideo Hayakawa,
Executive Director,
Bank of Japan.
CC:
Commissioner Ms. Jill E. Sommers, CFTC
Commissioner Mr. Bart Chilton, CFTC
Commissioner Mr. Scott D. O'Malia, CFTC
Commissioner Mr. Mark P. Wetjen, CFTC
Chairman Mary L. Schapiro, SEC
Under Secretary for International Affairs Lael Brainard, U.S.
Department of the Treasury
______
24 August 2012
David A. Stawick,
Secretary,
Commodity Futures Trading Commission,
Washington, D.C.
Subject: Comment Letter Proposed CFTC Rules
Dear Mr. Stawick,
The European Commission welcomes the opportunity to provide
comments on the proposed Cross-Border Proposed Interpretive Guidance
(RIN 3038-AD57) and the Proposed Exemptive Order (RIN 3038-AD85) as
published by the Commodity Futures Trading Commission (CFTC) on 12
July.
These comments should be seen in the important context of our
shared commitment in the G20 to comprehensively regulate over-the-
counter (OTC) derivative markets. Two years ago in Toronto, G20 Leaders
reaffirmed their commitment to improve transparency and regulatory
oversight of OTC derivatives ``in an internationally consistent and
non-discriminatory way''. Since then the European Commission and the
CFTC have engaged in a dialogue to fulfil those objectives. Regulatory
frameworks that will improve the stability of the financial system are
now in place in the U.S. and the EU and we have both made great efforts
to ensure the consistency of our requirements. We have also worked
together with a shared objective of avoiding duplicative and
conflicting requirements and rules to prevent their avoidance.
Nevertheless, we are of the view that the CFTC's proposed cross-
border Guidance and proposed Exemptive Order require further review in
order to contribute to achieving our common goal.
Definition of a `U.S. Person'
The European Commission understands the CFTC's concern about
exposing the U.S. financial system to significant risks through
connections with a foreign entity which is not resident or established
in the U.S. To this end the CFTC proposes a wide definition of a `U.S.
person'.
This wide definition determines the territorial scope of
application of the Dodd-Frank Act. The European Commission notes the
significant potential risk attached to this proposed approach. It will
maximise the potential for overlap and duplication of U.S. regulatory
requirements with those of other jurisdictions, including the EU. An EU
and a U.S. firm that conclude an OTC derivatives contract will be
simultaneously subject to EU and U.S. requirements. This will lead to
duplication of laws and to potentially irreconcilable conflicts of laws
for market operators. Examples of such situations are the following:
An EU-dealer could be subject for the same trade to the
European regulatory requirements (under EMIR, MiFID, and CRD
IV) and to CFTC requirements implementing the Dodd-Frank Act at
the same time.
A collective investment vehicle managed from the EU, but
with a majority ownership by U.S. persons would be subject to
regulatory requirements in the EU and to Dodd-Frank in the U.S.
Legal uncertainty is increased by the fact that the CFTC's proposed
interpretation of the term ``U.S. person'' is based on a non-exclusive
list of entities that fall within the definition. It is important for
the CFTC to provide further clarification about the process for
determining any other types of entities that it deems to be ``U.S.
persons'' in the future and how and when it intends to apply regulatory
requirements to those entities.
A further consequence and source of concern about the CFTC's
proposed approach is its practical and legal enforcement. The
application of U.S. rules to non-U.S. firms implies that they would
need to be enforced by U.S. regulators. In addition to the potentially
irreconcilable conflicts of laws firms will face and the significant
resource implications for the CFTC in view of the potentially large
number of firms involved, this will entail significant supervisory
inefficiencies as non-U.S. firms would be supervised by both the CFTC
as well as their home regulators. A duplicative application of EU and
U.S. rules could also lead to distortive and discriminatory situations.
Although we have made significant efforts to develop common
international standards in the field of OTC derivatives EU and U.S.
firms could face permanent legal uncertainty if this issue is not
resolved. We therefore suggest that the definition of a `U.S. person'
should be qualified and should not apply to a person or entity that is
not resident or established in the U.S. if the CFTC can establish that
it is resident or established in a jurisdiction which has rules in
force that are consistent with and comparable to those under the Dodd-
Frank Act.
It is reasonable to expect U.S. authorities to rely on those rules
and recognise activities regulated under them as compliant where those
activities have been subject to comparable standards under a foreign
jurisdiction. The concept of substituted compliance introduced in the
guidance is a positive step in this direction but does not go far
enough to deliver the full benefits of this approach for a consistent
international regulation of OTC derivatives markets (see below).
Registration
Under existing CFTC rules, Swap Dealers (SD) and Major Swap
Participants (MSP) will be required to register with the CFTC within 60
days of the final publication of a joint CFTC/SEC rule defining swaps,
i.e., before 12 October 2012.
First, we suggest that in view of uncertainties and significant
issues identified with the definition of a `U.S. person' proposed by
the CFTC the registration requirement for non-U.S. persons should be
delayed at least until the final cross-border Guidance has been
published. This will allow firms to determine whether they are required
to register and will minimize the regulatory risk involved with
incorrect registration.
Furthermore, as a consequence of the CFTC's proposed approach and
wide definition of `U.S. persons', many EU firms may be subject to the
registration requirement with the CFTC. This raises significant
concerns.
According to the CFTC's proposed interpretation of the Dodd-
Frank Act, a registration requirement would apply to a legal
person as a whole. In respect of a U.S. branch of an EU firm,
this may lead to a requirement for the EU-head office of the
parent company to register with the CFTC. First, if a U.S.
branch of an EU entity trades only with other non-U.S. persons,
there would seem to be no question of exposing the U.S.
financial system to significant risks. Second, in response to
the excessively wide scope of U.S. rules, EU banks might
consider converting their U.S. branches into affiliates in
order to avoid registration and its subsequent requirements
applying to the parent company. This would have the perverse
effect of introducing risk into the U.S., as an affiliate of a
non-U.S. bank will be a fully legally incorporated U.S. entity.
Furthermore, EU banks would face an increased cost in capital,
since they would have to maintain separate capital in these
affiliates.
In terms of process, in the future EU firms would also have
to monitor on an on-going basis if their volumes of swaps
breach the registration thresholds proposed by the CFTC.
We are of the view that these uncertainties, as well as the
significant and unnecessary incremental and running costs generated by
the obligation to register, could be avoided completely if the CFTC
were to consider an approach based on a wider recognition of EU rules
and increased cooperation between EU and U.S. regulators as discussed
below.
The treatment of non-EU firms proposed by the Commission in its
legislative proposal (MiFID II) in respect of trading in financial
instruments in EU financial markets could be a significant step to
opening access to EU financial markets for U.S. firms. However, the
CFTC's proposed registration requirements could put the adoption of
this approach into question as it is difficult to envisage that the EU
would adopt rules which would create an imbalance in treatment of EU
firms under U.S. law compared to the treatment granted to U.S. firms
under EU law.
`Substituted Compliance'
We appreciate the statutory constraints under which the CFTC
operates in the area of `substituted compliance' and appreciate the
efforts made to introduce this concept, which shares some similarities
with the European `equivalence' approach.
However, and to limit as much as possible the effects and the cost
of registration for EU-based firms, we strongly urge the CFTC to remove
the registration obligation for EU firms since they will be subject to
equivalent and comparable requirements. This would reduce the
incremental costs associated with the registration process and
alleviate compliance costs. This is similar to the approach adopted in
EU legislation.
We also appreciate that the proposed Exemptive Order addresses
certain sequencing issues in relation to the application of a number of
requirements. However, the proposal offers only temporary relief for
entity level-requirements. We believe that this should also be extended
to transaction-level requirements, including when they apply to non-
U.S. firms' transactions with U.S. firms.
As regards transaction-level requirements, additional fundamental
issues arise. We have reviewed closely and with great interest the
concept of `substituted compliance' described in the proposed
rulemaking. It is similar in some respects, but not all, to the
European concept of `equivalence', and may to a degree also achieve the
same results.
If we understand the CFTC's proposals correctly, substituted
compliance would apply only to transactions between two non-U.S. legal
persons. Substituted compliance would not apply to trades involving one
U.S. legal person and a non-U.S. legal person subject to comparable
rules under a third-country regime. In other words, this cross-border
application of the Dodd-Frank Act would imply that EU firms dealing
with U.S. counterparties would always be subject to Dodd-Frank, while
U.S. firms dealing with EU counterparties could not be subject to EU
rules if the EU decides to grant equivalence to the U.S. Although the
need for U.S. authorities to have certainty about the proper regulation
of trades entered into by subsidiaries of U.S. firms is legitimate, it
is difficult to understand why comparable foreign legislation would not
equally legitimately achieve the same result. In our view, a comparable
and consistent set of rules and requirements in the EU may equally
legitimately achieve the result sought by the U.S. authorities.
Second, wider application of substituted compliance by the CFTC is
very important for our consideration of a positive equivalence decision
in respect of the U.S. The adoption of an equivalence decision by the
European Commission would allow us to determine that EU firms may be
subject to the rules of a specific third country and still meet the
requirements in EU legislation because they are considered to be
equivalent. This is a direct and powerful instrument to avoid
subjecting EU and U.S. firms to duplicative and onerous central
clearing and margining requirements. The application of multiple sets
of rules to the same transaction undermines the G20's financial
stability objectives (trades may not be cleared in either
jurisdiction), it is economically and financially unsustainable for
U.S. and EU firms, and it is unwise from a market perspective as trades
may migrate to other jurisdictions. The power and ability of the
European Commission to adopt an equivalence decision to avoid all of
these profoundly negative effects is subject to one important
condition: the rules of the third-country concerned must be applied in
an `efficient and non-distortive' manner. If this cannot be determined
and the rules of a third country are considered to result in an
unbalanced state of affairs which creates a discrimination of treatment
between two jurisdictions, the European Commission could be prevented
from granting equivalence.
Third, we must draw your attention to a requirement in EMIR for the
Commission to adopt rules on the basis of technical standards drafted
by ESMA specifying which transactions between non-EU entities have a
`direct, significant and foreseeable effect' on the EU. There are
strong similarities between the potential scope of this rule--which has
not yet been adopted--and section 722(d) of the Dodd-Frank Act. If the
EU were to promulgate a rule with the same scope as the CFTC proposes
in its guidance, swaps between two U.S. affiliates of EU firms would be
subject to EMIR thus leading to the application of multiple rules to
U.S. firms.
Process for Substituted Compliance
In addition to the limited scope proposed for substituted
compliance, we also have serious reservations about the manner in which
the CFTC proposes to apply that approach.
As proposed, a decision by the CFTC determining substituted
compliance will not apply to jurisdictions (which is the case under
EMIR in the EU) but only to specific firms after a chapter by chapter
analysis and can be withdrawn from a firm at any time.
We encourage the CFTC to adopt a similar approach to that of the EU
which is based on the recognition of `equivalent' jurisdictions, and
not of individual firms. EU entities will be subject to highly
harmonised requirements for derivatives in the fields of clearing,
reporting and margining (EMIR Regulation 648/2012, Markets in Financial
Instruments Directive and Regulation--in the process of being updated),
and the Capital Requirements Directive for banking and investment firm
solvency. We understand that U.S. firms are subject to similar rules
and requirements. In this situation it would be duplicative to require
each EU entity seeking to benefit from substituted compliance in the
U.S. to separately demonstrate the equivalence of these EU rules with
Dodd-Frank. When determining acceptability for substituted compliance
we invite the CFTC to take into consideration whether another
jurisdiction complies with consistent and comparable standards.
The approach proposed by the CFTC will introduce legal uncertainty
and higher monitoring costs for EU firms than for U.S. firms that might
benefit from an EU equivalence decision. Moreover, the application on a
firm by firm basis could lead to different and even discriminatory
treatment between firms and jurisdictions.
We are of the view, however, that an approach that is based on an
effective system of `substituted compliance' or `equivalence' requires
close cooperation between regulatory authorities. The conclusion of
Memoranda of Understanding between regulators will be required to
establish clear rules and obligations in important fields of regulatory
cooperation such as access to information, on-site inspections, etc.
The European Commission is prepared to provide any necessary assistance
to facilitate a common framework for the conclusion of such agreements.
In conclusion, we are grateful for the opportunity to comment on
the proposed Interpretative Guidance and Exemptive Order which provide
the final cornerstones determining how the CFTC intends to contribute
to an internationally consistent and non-discriminatory regulatory
framework for the global OTC derivatives markets. As explained in our
comments we firmly believe that the CFTC's proposals require further
review in order to meet that goal. In the absence of this we believe
that the G20 commitments will not be met and that the efforts that the
EU and the USA and other jurisdictions have made will potentially
result in an uncoordinated, duplicative international regulatory
framework for OTC derivative markets. This will bring neither comfort
to regulators and policymakers, nor clarity and transparency to market
operators. It will create frequent regulatory conflicts and will
adversely impact the derivatives markets.
We look forward to discussing the issues raised in this comment
letter with the CFTC.
Yours sincerely,
Jonathan Faull,
Director General, Internal Market and Services,
European Commission.
______
24 August 2012
David A. Stawick,
Secretary,
Commodity Futures Trading Commission,
Washington, D.C.
FSA Comment on Proposed Interpretive Guidance and Policy Statement on
Cross-Border Application of Certain Swaps Provisions of the
Commodity Exchange Act (``Proposed Cross-Border Guidance'')
and Proposed Exemptive Order Regarding Compliance With
Certain Swap Regulations (``Proposed Exemptive Order'')
Dear Mr. Stawick,
We appreciate the ongoing dialogue between the CFTC and FSA in
relation to the cross-border application of the U.S. Dodd-Frank
legislation, and we would like to take this opportunity to provide
comments on behalf of the FSA on the two papers released by the CFTC
last month.
Our comments focus on a few areas of concern the FSA has with the
proposed cross-border guidance and proposed exemptive order.
Deadline for Registration of Non-U.S. Swap Dealers (``SDs'') and Major
Swap Participants (``MSPs'')
We understand that, in accordance with previous CFTC Dodd-Frank
rulemakings. those SDs and MSPs required to register with the CFTC will
be required to do so within 60 days of the publication in the U.S.
Federal Register of a joint final rule with the SEC providing further
definitions of ''swap'' and related terms.\1\ We understand that this
means that SDs and MSPs will need to register with the CFTC by 12
October 2012.
---------------------------------------------------------------------------
\1\ CFTC/SEC Joint Final Rule and Interpretation: Further
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-Based
Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping.
---------------------------------------------------------------------------
The CFTC acknowledges in its proposed cross-border guidance that
there is uncertainty over whether a non-U.S. person's swap dealing
activities will be sufficient to require registration as an SD. The
proposed guidance is designed, in part, to provide clarity on this
issue. Non-U.S. firms will therefore not be in a position to determine
whether they are required to register as an SD or MSP before the final
cross-border guidance is published. If this is close to, or after 12
October 2012, there is a risk that firms will incorrectly register (or
conversely. not register when they should), which exposes them to
regulatory risk.
We therefore suggest that the CFTC delays imposing the registration
requirement on non-U.S. persons until a defined period (perhaps 6
months) after the CFTC has finalised its cross-border guidance. This
would allow firms time to interpret the guidance and make an informed
and considered decision on the appropriate entities to register.
Application of Transaction-Level Requirements To All Registered SDs and
MSPs
Section III.B.S of the proposed cross-border guidance outlines the
application of Dodd-Frank transaction-level requirements, specifically
``to require non-U.S. swap dealers and non-U.S. MSPs to comply with
Transaction-Level Requirements for all of their swaps with U.S.
persons, other than foreign branches of U.S. persons, as
counterparties''.
The corresponding European Union legislation (the Regulation of the
European Parliament and of the Council on OTC derivatives, central
counterparties and trade repositories--``EMIR'') takes a fundamentally
different approach. Under EMIR, where a foreign regime is deemed to be
equivalent, ``counterparties entering into a transaction subject to
this Regulation shall be deemed to have fulfilled the obligations
contained in [relevant articles] where at least one of the
counterparties is established in that third country.'' \2\
---------------------------------------------------------------------------
\2\ Regulation (EU) No. 648/2012 of the European Parliament and of
the Council on OTC derivatives, central counterparties and trade
repositories, Article 13(3).
---------------------------------------------------------------------------
We are concerned that the proposed cross-border guidance does not
allow for a similar equivalence-based process, and will instead require
firms to meet Dodd-Frank transaction-level requirements where one of
the counterparties is a U.S. person. In our view this has the potential
to have a real impact on trades between UK and U.S. firms. For example,
it is likely to result in the Dodd-Frank requirements being exported to
a wide range of UK (and other EU) firms, for example resulting in any
UK firm doing business with a U.S. firm needing to trade on a CFTC-
registered Swap Execution Facility and clear the trade on a CFTC-
registered clearing organisation. Were any non-U.S. legislation/
regulation to take a similar approach to the proposed cross-border
guidance. then a real risk of regulatory conflict for cross-border
trades, potentially prohibiting such business, would exist.
We would therefore encourage the CFTC to take an approach similar
to that taken in EMIR. This would build on the substantial work done at
an international level to ensure a consistently strong level of
regulation of global derivatives markets, enabling each jurisdiction to
determine independently which other jurisdictions it considers
equivalent, to ensure there is no dilution in the strength of local
regulations.
Impact of Proposed Exemptive Order on Non-U.S. Persons
The proposed exemptive order would ``allow non-U.S. SDs and non-
U.S. MSPs to delay compliance with certain Entity-Level
Requirements''.\3\ We believe this is appropriate as it will provide
time for those firms for whom substituted compliance is possible to
make an application to meet CFTC requirements through that route.
---------------------------------------------------------------------------
\3\ Proposed Exemptive Order, Section III.
---------------------------------------------------------------------------
However, the proposed exemptive order only provides limited relief
in relation to transaction-level requirements. Related to the previous
point on the general application of transaction-level requirements to
non-U.S. SDs and MSPs, we believe that the delays in required
compliance in the proposed exemptive order should extend to also cover
transaction-level requirements for non-U.S. SDs and MSPs. This would
provide time for the CFTC to undertake determinations of substituted
compliance before the requirements become binding on firms.
Substituted Compliance Process
We broadly support the process outlined in Section V of the
proposed cross-border guidance for the determination of substituted
compliance for an individual jurisdiction. We do however believe there
are a number of additional points or changes that could be made in the
proposed cross-border guidance that would help provide clarity to
market participants on the process for determining substituted
compliance.
EU entities will be subject to highly harmonised regulation
on derivatives issues, with the EMIR regime for OTC derivatives
clearing, reporting and margining, the Markets in Financial
Instruments Directive (soon to be updated) for trading-related
issues and the Capital Requirements Directive for banking and
investment firm solvency. It would therefore seem duplicative
to require each EU entity seeking to benefit from substituted
compliance to separately demonstrate the equivalence of these
EU rules with Dodd-Frank. In the EU, assessments of equivalence
will be undertaken at a jurisdictional level. As far as
possible, we believe it would be beneficial, and more
efficient, if the CFTC were to take a jurisdictional rather
than firm-by-firm approach.
In our view, the guidance could also outline more clearly in
what circumstances a particular foreign jurisdiction will be
acceptable for substituted compliance, and where substituted
compliance will only be able to be determined for specific
requirements as opposed to the entire set of CFTC swap
requirements.
As a further point we would encourage you to consider
outlining in the guidance how the CFTC will make a
determination of substituted compliance when regulatory reform
in another jurisdiction is underway but not yet complete. For
example, it remains unclear whether the CFTC could deem another
jurisdiction to be acceptable for substituted compliance on the
basis that a jurisdiction has rules entering shortly into
force.
We also believe it would be beneficial for the guidance to
outline the anticipated timing of the CFTC's substituted
compliance assessments, so that firms can have some certainly
around whether there will be a gap between the expiry of the
exemptive order and the relevant substituted compliance
determinations.
Finally on this point, we would encourage the CFTC to take
into consideration compliance with relevant international
standards in the determination of acceptability for substituted
compliance. In general, compliance with relevant international
standards (such as the CPSS-IOSCO Principles for Financial
Markets Infrastructure or various reports of IOSCO) should be
an important factor in determining if a jurisdiction has a
regime acceptable for substituted compliance.
Treatment of U.S. Branches of Non-U.S. Persons
We are concerned there is a lack of clarity about the treatment of
U.S. branches of non-U.S. persons in the proposed cross-border
guidance.
Section II.D.3 of the proposed cross-border guidance suggests that,
in certain circumstances, a U.S. branch of a non-U.S. person could be
required to register with and be subject to oversight by the CFTC. We
are particularly concerned that a non-U.S. person, who may trade only
with other non-U.S. persons, could become subject to CFTC registration
and oversight due only to the activities of a U.S. branch of the non-
U.S. person.
As an example, it appears under the proposed cross-border guidance
that a New York branch of a UK bank that is facilitating trades between
the UK bank and another non-U.S. bank could result in the New York
branch, or the UK bank itself, being required to register with the CFTC
despite the legal person being located outside the U.S. and trading
only with non-U.S. persons. We believe in this scenario that the
transaction entered into by the non-U.S. person through a U.S. branch
is unlikely to introduce any risk into the U.S.
We therefore believe the guidance could be clarified to make clear
that the presence of a branch in the U.S. should not, in itself, result
in the branch or parent entity becoming subject to CFTC registration
and prudential requirements, unless they are required to do so on some
other basis.
Definition of a U.S. Person
We understand the CFTC's desire to avoid a situation where the U.S.
financial system is exposed to undue risks through links to a foreign
entity. However, defining an entity which is not resident or
established in the U.S. as a U.S. person comes with a risk of conflict
of laws, particularly where that person is resident or established in a
jurisdiction with a highly developed regulatory system. For example, a
collective investment vehicle managed from the EU, but with a majority
ownership by U.S. persons, would be subject to the Alternative
Investment Fund Managers Directive and EMIR in the EU and to Dodd-Frank
in the U.S., and the multiple registration requirements could present a
significant possibility of conflict of laws. We would encourage a
qualification to be added to the definition of U.S. person to state
that an entity which is neither established nor resident in the U.S.
will not be classed as a U.S. person where it is established or
resident in a jurisdiction which has in force regulations with
equivalent effect to Dodd-Frank.
We thank you again for providing the opportunity to comment on
these important releases, and we look forward to continued strong
engagement between the CFTC and the FSA. We would be happy to discuss
any of these issues raised with you further.
Yours sincerely,
David Lawton,
Director of Markets, Financial Services Authority;
Stephen Bland,
Director of Investment Banks and Overseas Banks, Financial Services
Authority.
______
27 August 2012
Hon. Gary Gensler,
Chairman,
Commodity Futures Trading Commission,
Washington, D.C.
Dear Gary,
1. We appreciate an opportunity to comment on the Commodity Futures
Trading Commission (``CFTC'')'s draft interpretative guidance on the
``Cross-Border Application of Certain Swaps Provisions of the Commodity
Exchange Act'' (the ``Proposed Guidance'') in July 2012. We are writing
to express our concerns and to seek clarification on various aspects of
the Proposed Guidance as raised by our regulators and the industry.
2. The Proposed Guidance indicates that the CFTC intends to regard
non-U.S. persons as being subject to the CFTC registration requirements
under certain conditions. We are concerned that such an approach to
extend the CFTC's jurisdiction to the operation of foreign financial
institutions would result in such institutions having to meet
overlapping, and possibly conflicting, regulations in the U.S. and
their home jurisdictions, and would undermine regulatory reform efforts
currently under way in other jurisdictions including Hong Kong.
Moreover, the proposed extension of the CFTC's jurisdictional reach
would increase compliance costs for global market participants and more
importantly, may discourage market participants from entering into
Over-the-counter (``OTC'') derivatives transactions with U.S. persons,
resulting in market fragmentation and liquidity withdrawal.
Particularly for those provisions that may be in conflict with local
legislation, enforceability is called into question.
Defining ``U.S. Persons''
3. Regulators in Hong Kong, the Securities and Futures Commission
(``SFC'') and the Hong Kong Monetary Authority (``HKMA''), have
examined the Proposed Guidance with market participants operating in
Hong Kong with the view to assessing the impact that such guidance may
have on them and their operations here. The general feedback is that
there is insufficient clarity as to how the U.S. rules and regulations
will be applied to non-U.S. based swap dealers (``SDs'') and non-U.S.
major swap participants (``MSPs''), leading to concerns about the
practical implementation issues arising from the Proposed Guidance. A
major area of concern is how the term ``U.S. person'' will be
construed. As you will agree, it is critical for a non-U.S. person to
be able to independently determine if it falls within the registration
requirements of the CFTC rules. As we understand it, this hinges on
whether the non-U.S. person's counterparty is a ``U.S. person''. In
this regard, our market participants are concerned that the Proposed
Guidance does not provide sufficient clarity or specificity to enable
them to ascertain whether their counterparties will be construed by the
CFTC as U.S. persons. Consequently, it is also difficult for them to
assess the full impact of the registration requirements on them and
their operations. This also hampers the ability of global players in
the OTC derivatives market to streamline their structure and operations
when dealing with both U.S. and non-U.S. counterparties.
Enforceability Issues
4. Besides, financial institutions registered as non-U.S. based SDs
are required to report all OTC derivatives transactions to a Swap Data
Repository (``SDR''). Market participants are concerned about whether
they could legally transfer customer data to the foreign SDRs to meet
CFTC's reporting requirements, given that the client account opening
documents are governed by the local laws and in the context of
fulfilling the reporting obligations, the U.S. authorities are neither
the banks' home or host regulators. Therefore, for the avoidance of
legal risk, non-U.S. based SDs may be unable to continue dealing with
non-U.S. customers in the OTC derivatives market unless these customers
provide explicit consent to release their data to meet the U.S.
reporting requirements or substituted compliance is permitted. This
places them at competitive disadvantage versus peers which are not
subject to the same restriction.
``Substituted Compliance''
5. The Proposed Guidance indicates that the CFTC will allow for
``substituted compliance'', i.e., compliance with local laws and
regulations will be regarded as sufficient if such laws and regulations
are comparable to U.S. rules and regulations. In the extreme cases,
such requirements may force financial institutions to refrain from
certain OTC derivatives activities, thus hampering liquidity in the
global markets. However, it isn't clear how the CFTC will assess
comparability for the purposes of allowing ``substituted compliance'',
making it rather difficult for market participants and foreign
regulators to understand how comparability will be applied in practice.
Regulatory Cooperation on Cross-Border Transactions
6. We believe the international community should work together to
build a cooperative framework for the regulation of OTC derivatives
market on the global basis. As the OTC derivatives market is a global
one, it is important that regulators adopt comparable rules based on
guidance and standards set by international standard setting bodies.
International standards and principles serve to harmonise regulatory
standards and minimise regulatory arbitrage, while also respecting
jurisdictional authority. Regulators in major markets have been working
together through international standard setting bodies (such as the
International Organisation of Securities Commissions and the Committee
on Payment and Settlement Systems of the Bank for International
Settlements) to agree on common standards and principles for regulating
the OTC derivatives market. Reform efforts in individual markets,
including Hong Kong, have also been progressing by reference to these
international standards and principles.
7. As foreign jurisdictions would have primary responsibilities in
developing and implementing the regulatory frameworks for the OTC
derivatives market participants and their transactions in their own
jurisdictions. To avoid regulatory overlap and in the spirit of
international comity, we propose that foreign jurisdictions be
responsible for the regulation of OTC derivatives activities in their
home jurisdictions in accordance to international standards. Under this
framework, the application of the CFTC's rules to non-U.S. persons,
e.g., foreign banks, should only be confined to their legal entities
based in the U.S. (i.e., U.S. branch or subsidiary). In this
connection, we would like to request the CFTC to reconsider the need
and the implication of the extraterritorial application of the U.S.
derivative regulations, including swap dealer registration requirement
for non-U.S. persons (including Hong Kong financial institutions).
8. We understand and appreciate CFTC's concerns over the activities
of U.S. persons and their overseas branches and subsidiaries conducted
outside the U.S. that may have a significant connection and impact on
the U.S. markets and thus giving rise to CFTC's proposal for cross-
border application of their regulations. We should continue to explore
how foreign subsidiaries of U.S. entities could meet the CFTC's rules
on swap without coming into conflict with local regulations. Before
international consensus is reached on this important matter, we would
like to propose that CFTC defers application of its regulation with
respect to non-U.S. person so that regulators in international forum
could work out the arrangement for regulating cross-border OTC
transactions in a coordinated manner.
Central Clearing of OTC Derivatives
9. Furthermore, under the Proposed Guidance, non-U.S. based SDs in
order to comply with CFTC requirements, will be compelled to clear
their OTC derivatives transactions through a U.S. regulated central
counterparty (``CCP'') in certain cases. Specifically, non-U.S. based
SDs who transact with U.S. counterparties, or counterparties guaranteed
by U.S. persons, will have to clear their OTC derivatives transaction
through a CCP that is either registered in the U.S. as a Derivatives
Clearing Organization (``DCO''), or exempted from having to be
registered as a DCO. This requirement has significant implications
because it means non-U.S. based SDs who want to clear through their
local (non-U.S.) CCPs, some of which provide service for unique local
products, could do so only if such CCPs would have been registered (or
exempted from being registered) as DCOs before the implementation of
the clearing obligations under the Dodd-Frank Act. If the CCPs fail to
obtain such registration or exemption status in good time, there will
be significant disruption to the global OTC derivatives market. For
example, many market participants will need to establish in short time
new clearing arrangements with CCPs which are U.S.-regulated DCOs, or
already registered as such. Otherwise, they may have no choice but stop
transacting with U.S. persons at all to avoid risking non-compliance.
Either way, the consequences for market participants will be
significant.
10. It is believed that the above unintended and undesirable
consequences can be avoided or minimised. In this regard, I urge the
U.S. authorities to consider the following:
i. Transitional arrangement. Allow OTC derivatives transactions
conducted outside the U.S. to carry on as usual during the
processing period for a DCO application or a ``substituted
compliance'' application;
ii. Exempting foreign CCPs. Provide exemption from the DCO
registration if a foreign CCP is not systemically important to
the U.S. market. For example, a de minimis exemption could be
provided (similar to the de minimis threshold for the SD
registration) such that foreign CCPs that clear OTC derivatives
transactions for U.S. persons below a certain threshold, may be
exempted from the DCO registration; and
iii. Recognising foreign CCPs. Develop a simplified process for
recognising foreign CCPs that are regulated by competent
authorities subscribing to international standards.
11. In conclusion, we call for greater coordination internationally
on implementation of OTC regulations, particularly those with cross-
border implications. We hope that the CFTC, SEC and the U.S. Treasury
will defer the application of the U.S. rules and regulations over non-
U.S. persons and work with the international community on a coordinated
framework on regulatory cooperation in cross-border OTC transactions.
We also hope that U.S. authorities would provide greater clarity to the
Proposed Guidance and to recognize the OTC derivatives regulatory
regimes of overseas jurisdictions on the basis of international
standard.
Yours sincerely,
Professor K.C. Chan, Secretary for Financial Services and the Treasury.
CC:
Secretary of the Treasury, USA, (Mr. Timothy Geithner)
Chairman, U.S. Securities and Exchange Commission (Ms. Mary L.
Schapiro)
Consul General of the United States of America in Hong Kong (Mr.
Stephen Young)
Chief Executive, Hong Kong Monetary Authority (Mr. Norman Chan)
Chief Executive Officer, Securities and Futures Commission (Mr.
Ashley Alder)
Hong Kong Commissioner for Economic and Trade Affairs, USA (Mr.
Donald Tong)
______
27 August 2012
Hon. Gary Gensler,
Chairman,
Commodity Futures Trading Commission,
Washington, D.C.
CFTC's Proposed Guidance on Cross-Border Application of Certain Swap
Provisions of Commodity Exchange Act (``Proposed
Guidance'')
Dear Chairman Gensler,
1. We, the undersigned, are a group of financial regulators in the
Asia Pacific region with a mutual interest in ensuring the smooth and
effective implementation of the G20-agreed reforms of OTC derivatives
markets in our jurisdictions. We welcome the release of the Proposed
Guidance by the CFTC to clarify how it intends to apply the Commodity
Exchange Act to cross-border swap dealing activities involving non-U.S.
persons, and acknowledge the CFTC's efforts to consider the impact of
the swap provisions on non-U.S. markets and participants. However, we
are concerned that some of the proposed requirements as they currently
stand may have significant effects on financial markets and
institutions outside of the U.S. We believe a failure to address these
concerns could have unintended consequences, including increasing
market fragmentation and, potentially, systemic risk in these markets,
as well as unduly increasing the compliance burden on industry and
regulators. We therefore think it necessary to share with you our
specific concerns, as well as some suggestions to mitigate these
concerns, so that any unintended and adverse consequences for global
markets and institutions can be averted.
Major Issues and Suggestions
2. Currently, various national authorities around the globe
(including those represented in this letter) are taking active steps to
implement in their jurisdictions the reform measures endorsed by the
G20 leaders in respect of OTC derivatives markets, with a view to
promoting transparency and confidence in derivatives markets and
reducing systemic risks arising from activities in such markets.
3. However, the CFTC Proposed Guidance, that subjects non-U.S.
persons to the swap dealer (``SD'') or major swap participant (``MSP'')
registration requirements as well as entity-level and transaction-level
requirements, may have the following consequences:
Affected non-U.S. persons will have to comply with two sets
of regulations, which may be overlapping and conflicting,
imposed by the U.S. and individual non-U.S. regimes. This is
compounded by the lack of clarity and specificity in a number
of areas of the Proposed Guidance.
Potential market disruption or fragmentation, with
consequently increased risks to systemic stability and market
liquidity in our markets, may arise as market participants may
have to change their business models or even withdraw from
certain businesses, all within a relatively short period of
time. The impact from any resulting (likely significant)
increase in compliance costs and the potential reduction in
liquidity of OTC derivatives markets should not be under-
estimated.
4. In our view, while the approach proposed by the CFTC is a useful
first step, further changes are needed to the Proposed Guidance to
achieve an internationally harmonised approach and avoid creating
frictions in the international market place, given the cross-border
nature of OTC derivative markets and the concerns expressed in this
letter and also by other regulators.
5. We would thus urge the CFTC to consider the following
suggestions:
(i) Re-assess scope and timing for implementing the Proposed
Guidance: We suggest that a re-assessment of the CFTC's
proposed approach should be made to avoid any unintended and
adverse implications for global markets and institutions. This
should preferably be done together with engagement with
affected jurisdictions (including ourselves) to address their
concerns before finalising the Proposed Guidance. We seek
further dialogue with the CFTC to do so. Consideration should
also be given to deferring the application of the relevant
requirements until there is international consensus on how such
cross-border transactions should be regulated.
Rather than a rule-by-rule or case-by-case approach as it is
currently proposed, an approach that looks at substantive
regulatory outcomes (where appropriate) or an expansion to
place greater reliance on the regulatory and supervisory
regimes of other regulators would better achieve the concept of
international comity which the CFTC is seeking.
(ii) Provide more guidance and clarity on assessment of substituted
compliance and definition of U.S. person: Notwithstanding the
suggestions in Paragraph 5(i), we believe the Proposed Guidance
would benefit from greater clarity and detail regarding the
application of the swap provisions. In particular, (a) the
definition of ``U.S. person''; and (b) the criteria, procedures
and implementation timeline for ``substituted compliance'' in
respect of each of the CFTC's entity-level requirements and
transaction-level requirements could each be further clarified.
We would welcome dialogue with the CFTC on these areas.
We note that the proposed definition of ``U.S. person'' is high-
level and different from that used in other regulations (e.g.,
Reg S.). Market practitioners have also highlighted that it is
not easy to identify if a counterparty is a U.S. person.
Uncertainty will increase the risk for, and costs of, market
participants in assessing the full impact of the Proposed
Guidance (e.g., the registration requirements).
On substituted compliance, the Proposed Guidance contains broad
language to the effect that the CFTC would determine
comparability for the purposes of ``substituted
compliance''.\1\ However, it is unclear on how comparability
will be assessed and whether there will be interim measures
prior to finalising the assessment as no further details or
elaboration are provided in the Proposed Guidance.
---------------------------------------------------------------------------
\1\ Considerations include (i) the ``scope and objectives'' of the
regulatory requirements imposed by a non-U.S. regulator; (ii) the
comprehensiveness of the regulator's supervisory compliance programme;
and (iii) the regulator's power to support and enforce its oversight of
non-U.S. SDs and MSPs operating in its jurisdiction.
---------------------------------------------------------------------------
We are of the view that one useful point of reference for
substituted compliance assessment would be the foreign regime's
compliance with applicable global standards set by
international standard-setting bodies like the CPSS, IOSCO and
the Basel Committee on Banking Supervision. Moreover, just as
the CFTC has proposed requirements which are tailored to the
U.S. market, there is also a need for other regulators to cater
for special characteristics of their local markets. For
example, in the case of Hong Kong, Australia and Singapore, we
are studying whether local market liquidity can justify
implementation of mandatory trading of OTC derivatives products
on exchanges or electronic trading platforms, and the form of
trading venue which will best suit the purpose of improving
pre-trade price transparency. This will affect our timing for
implementing mandatory trading in practice (although the powers
for imposing such trading obligation will be in place). In
addition, the CFTC has recognised that the pace of
implementation of OTC derivatives reforms by different
jurisdictions may vary, and we suggest that the approval for
``substituted compliance'' should take into account, among
other things, the proposed regulations, and the progress in
introducing these regulations, in ``potentially comparable''
jurisdictions.
(iii) Allow transitional arrangements for application of Proposed
Guidance to non-U.S. entities: To minimise the risk of market
disruption and fragmentation in respect of the conduct of OTC
derivatives transactions outside the U.S. that will likely be
captured under the Proposed Guidance, we strongly recommend the
CFTC to consider more flexible transitional arrangements that
will allow market participants to carry on such transactions as
usual as it reviews jurisdictions for the purpose of
``substituted compliance'', in line with the spirit of
international comity.
(iv) Consider further temporary exemptive relief for non-U.S. SDs
and MSPs: We note that certain requirements, e.g., capital and
margin rules, the SEF rules, may not be finalised before the
swap dealer registration deadline. It is thus strange for non
U.S.-based entities to register without having certainty on the
full implications of the registration.
In addition, certain SD requirements may conflict with domestic
requirements. For example, non-U.S. SDs that are regulated as
banks may be prohibited by local privacy laws from transferring
customer data to the U.S. for reporting swap transactions. To
avoid legal risk, non-U.S. SDs may be unable to continue
dealing with non-U.S. customers in the OTC derivatives market
unless (a) their customers provide explicit consent to the
release of their data in order to meet the U.S. reporting
requirements; or (b) ``substituted compliance'' is permitted.
As such, we request that the CFTC considers delaying the
registration requirement for non-U.S. SDs until there is
clarity of the above issues.
Furthermore, we have two comments with respect to the proposed
granting of temporary exemptive relief order, to allow non-U.S.
SDs and MSPs to delay compliance with certain entity-level and
transaction-level requirements. First, we suggest that the
``non-affiliate'' condition is removed or modified as it will
capture foreign affiliates that operate independently from the
U.S. SD (and are not under the SD's majority control) and whose
swaps with non-U.S. counterparties are unlikely to have
significant systemic risk implications for the U.S. Second,
while we appreciate the intent of this temporary relief, it is
subject to progress made on operationalising ``substituted
compliance'' as well as more clarity on the conditions to which
the relief is subject.
(v) Consider proportional regulatory approach to central
counterparties (``CCPs'') in non-U.S. jurisdictions with
relatively small OTC derivatives markets: We would strongly
encourage the U.S. authorities to develop a simplified and
pragmatic process for (a) recognising or exempting non-U.S.
CCPs (including those that operate in relatively small OTC
derivatives markets) that are regulated by competent
authorities subscribing to relevant CPSS/IOSCO standards; and
(b) handling applications for ``substituted compliance'' with
priority (provided that clear guidance on application criteria
and procedures is available to potential applicants). In
formulating this process, the CFTC is also requested to have
regard to the potential impact on non-U.S. CCPs and markets as
explained below.
Under the Proposed Guidance, non-U.S. SDs, which may be
significant liquidity providers in foreign jurisdictions, will
be required to centrally clear their OTC derivatives
transactions with (a) U.S. counterparties or (b) non-U.S.
counterparties that are guaranteed by U.S. persons (although
``substituted compliance'' may be permitted for transactions
described in (ii)) through registered or registration-exempted
Derivatives Clearing Organisations (``DCOs''). If the CFTC
mandates clearing for products that are also traded in our
markets, it will be critical that CCPs operating in those
markets be able to obtain approval from the CFTC as a
registered DCO (or be exempted from registration) in good time,
to allow participants to clear mandated transactions.
Failure of a CCP to obtain approval as a registered DCO (or be
exempted from registration) in time may lead to the following
consequences:
The mandated transactions may be channelled to registered
DCOs which are now global facilities. This raises concerns
over the potential over-concentration of risks in such
CCPs.
Certain U.S. SDs operating in the Asia Pacific region are
major liquidity providers in local markets. If they are not
allowed to use clearing platforms other than DCOs that are
U.S.-registered or exempt from registration, and other
smaller local/regional players can only access central
clearing indirectly, the overall capacity of these players
to further provide liquidity in local/regional OTC
derivatives markets may be curtailed.
This development may also undermine the financial
viability of local/regional CCPs, in turn resulting in such
CCPs ceasing to provide important clearing services for
products that are unique to our financial markets and not
cleared through foreign CCPs registered as DCOs,
potentially increasing systemic risk in such markets and
impacting the stability of U.S. markets and/or major
participants as well.
Lastly, local and regional market participants who do not
have direct access to global CCPs may have to face the
credit risk of a small group of clearing agents who are
likely to be the same global dealers with whom they are
dealing, potentially restricting their counterparty risk
management capacity. This also adds to, and further
concentrates, the risks at the major clearing members.
6. We appreciate the opportunity to provide our comments to the
Proposed Guidance and look forward to our continued cooperation and
engagement with the CFTC and other regulators to provide globally
harmonised regulations for an efficient and robust OTC derivatives
market.
Yours sincerely,
Belinda Gibson, Arthur Yuen, Teo Swee Lian,
Deputy Chairman, Deputy Chief Executive, Deputy Managing
Director,
Australian Securities Hong Kong Monetary (Financial
and Supervision),
Investments Commission; Authority; Monetary Authority of
Singapore;
Malcolm Edey, Keith Lui,
Assistant Governor Executive Director
(Financial System), Supervision of Markets,
Reserve Bank of Securities and Futures
Australia; Commission, Hong Kong.
______
27 August 2012
Hon. Gary Gensler,
Chairman,
Commodity Futures Trading Commission,
Washington, D.C.
Ref: Answer to the Proposed Interpretative Guidance and Policy
Statement on Cross-Border application of Certain Swaps
provisions of the Commodity Exchange Act--RIN number 3038-
AD57
Dear Gary,
On 12 July 2012, the Commodity Futures Trading Commission (CFTC)
published a proposed interpretative guidance and policy statement
regarding the Cross-Border application of Certain Swaps provisions of
the Commodity Exchange Act.
This consultation is of particular relevance to ESMA which is
tasked with drafting technical standards under EMIR, including
determining derivative contracts that are considered to have a direct,
substantial and foreseeable effect within the European Union, as well
as assisting the European Commission in its own task of adopting
decisions on equivalence of the legal, supervisory and enforcement
framework in third countries. We have maintained an open and fruitful
dialogue with the CFTC in the past on these matters and we will
continue to do so, in the interest of regulatory convergence at
international level.
In a market which is global in nature, it is particularly important
that regulations in the different jurisdictions converge. Convergence
and, consequently, avoidance of gaps and overlaps, will contribute to a
safe and efficient global derivatives market.
In order to prevent overlaps, it is important that regulators in
different jurisdictions rely on each other especially when an
equivalent regulation is implemented in the relevant jurisdiction.
Indeed it is of paramount importance to strictly limit, if not
eliminate, any overlap that could jeopardise both safety and efficiency
of the derivatives market and that could negatively impact on the
implementation of the G20 commitments.
We would like to comment as follows:
U.S. Person and Registration
The proposed interpretation of the scope of what has a ``direct and
significant connection with activities in, or effect on, commerce of
the United States'' is broad.
The CFTC proposes that non-U.S. persons who engage in more than a
de minimis level of swap dealing with a U.S. person are required to
register as a swap dealer (SD). In addition, non-U.S. persons who hold
swap positions above the Major Swap Participants (MSP) specified
thresholds with a U.S. counterparty are required to register as MSP.
In practice, this would mean that European entities (whether or not
affiliates or subsidiaries of U.S. entities) would be subject to CFTC
registration requirements if they enter into transactions (above the SD
or MSP thresholds) with U.S. persons. This means that these European
entities will be subject at the same time to Dodd-Frank and EMIR
requirements.
We believe that the scope of the derivative transactions to be
considered for the purpose of determining the registration requirement
of SD or MSP should be limited to relevant transactions and to those
other activities which could be carried out with the purpose of
circumventing any relevant obligation. Indeed, it would be appropriate
to consider that only transactions that might result in a significant
exposure for a U.S. person should be deemed to have a direct and
significant impact in the U.S.
Far-reaching entity level registration requirements imposed on
European entities as well as a limited scope for substituted compliance
(as discussed below), contributes to dual regulatory compliance
requirements. This is why we ask the CFTC to reconsider the need for
European entities to register as SD or MSP to the extent they are fully
subject to EU legislation on OTC derivatives.
In addition, CFTC registration requirements would apply to European
entities irrespective of whether they would solicit the counterparty in
the U.S. or whether the transaction would be concluded at the
initiative of the U.S. person. Moreover, in the case of U.S. branches,
registration of the European head office is required even though the
transactions would be legally entered into by the parent entity outside
the U.S., with no additional risk for the U.S. compared to similar
entities operating without U.S. branches.
In Europe, under the MiFID proposal, the EU regime would be
applicable to third country investment firms only if the latter promote
their services or solicit clients in the EU. Such regime would not
apply in the case of the provision of services by the third country
investment firm at the exclusive initiative of the EU clients. Under
the MiFID proposal, third country entities would also remain subject to
their home country legislation if deemed equivalent by the European
Commission.
The broad scope of the definitions of a U.S. person, SD and MSP,
and the resulting registration requirements could have a serious impact
on the current business model of European and U.S. firms which may not
be proportionate to the benefits being sought. Alternative approaches
should be envisaged to ensure that the objectives of U.S. regulations
are satisfied.
Substituted Compliance
We appreciate the introduction of the concept of substituted
compliance in the CFTC's proposal. However, we see two limitations in
the concept, apart from its application (commented below):
We have always been of the view that when equivalence or
substituted compliance is granted for an entire jurisdiction,
registration of entities located in that jurisdiction,
including affiliates or subsidiaries of U.S. entities, should
not be required. However, in the U.S. proposed regime,
registration is a pre-requisite before substituted compliance
could apply.
We believe that the proposed use of substituted compliance
is still very limited. It would apply on a chapter by chapter
basis, and in some instances, on a case by case basis. It would
also only apply to transactions between non-U.S. persons and
not to cross-border transactions. If applied in this form, such
an approach would be far away from the concepts of equivalence,
mutual recognition and avoidance of duplicative or conflicting
rules included in EMIR.
We understand that substituted compliance would apply for entity
level requirements on a firm by firm basis but with provisions for
applications by groups or by whole jurisdictions. It is important to
note that EMIR is a regulation directly applicable in the 27 EU Members
States. This will also be the case for the technical standards
developed by ESMA that will take the form of a European Commission
Regulation. Other entity-level requirements have already been
introduced in Europe through either MiFID or the Capital Requirements
Directive (CRD). Under this EU regime, firms established in European
countries will apply these rules without any option to apply different
rules. Because there is one set of rules that applies across the EU,
and in order to facilitate the assessment and to limit the burden on
European firms, substituted compliance should apply to all EU firms
rather than at firm specific level. This is also the case for ensuring
a consistent application of enforcement and supervision across EU
firms. In this respect, there are several ESMA mechanisms to ensure
that supervision and enforcement are convergent and comparable across
the EU. Against this background, the European approach on equivalence
is based on an overall assessment of the regulatory and supervisory
regime in a particular jurisdiction and we encourage the CFTC to adopt
a similar approach for substituted compliance for the entire EU.
Concerning the application of substituted compliance to transaction
level requirements, we believe that its application is too narrow. We
understand that substituted compliance would apply to transactions
between two non-U.S. counterparties but, for cross-border transactions
(e.g., between a U.S. and a European counterparty) substituted
compliance is not allowed. This would mean that both the European and
U.S. regulations would apply to a transaction. We believe it would be
essential to consider the application of substituted compliance for
transactions between European and U.S. firms.
Under Article 13 of EMIR, the European Commission, assisted by
ESMA, will monitor the international application of requirements for
OTC derivatives in particular with regard to potential, duplicative or
conflicting requirements. In addition, the European Commission may take
an equivalence decision to allow for the application of an equivalent
third country regime for transactions between European and third
country firms. Therefore, in order to allow for an equivalence decision
and positive monitoring, it is important that the third country rules
do not duplicate or conflict with the European regime. We urge the CFTC
to extend the scope of substituted compliance to ensure a smooth
adoption of a mutual recognition approach, to avoid an unacceptable
situation for both market participants and regulators.
In addition to Article 13 of EMIR, ESMA (under Articles 4 and 11)
has to draft regulatory technical standards specifying the contracts
that are considered to have a direct, substantial and foreseeable
effect within the Union or the cases where it is necessary or
appropriate to prevent the evasion of any provisions in EMIR. We are
working on the development of this draft technical standard. In that
context, the broad scope of a U.S. person definition and the limited
use of substituted compliance might make this work complex in view of
the objective to avoid duplications and potentially conflicting
provisions which could have serious consequences for both U.S. and
European firms.
We believe that we will succeed in building a sound and coherent
global framework leading to improved transparency, efficiency and
robustness of the OTC derivatives market, in accordance with the G20
commitments. To that end, although we welcome the introduction of the
concept of substituted compliance, we are convinced that it will not be
possible to achieve our common objective without changing significantly
its scope to a regime where true reliance on the EU regulatory and
supervisory regime is achieved. This could be done by expanding the
number of cases where it can be applied (especially transaction level
requirements) and by applying it EU-wide, instead of firm by firm or
country by country.
ESMA stands ready to assist the CFTC in assessing the conditions
for substituted compliance in a EU-wide approach.
I hope that these comments will help and look forward to continued
cooperation with the CFTC with the aim to deliver convergent regulation
for a safe and efficient OTC derivatives market.
Yours sincerely,
Steven Maijoor, Chair, European Securities and Markets Authority.
______
August 27, 2012
Hon. Gary Gensler,
Chairman,
Commodity Futures Trading Commission,
Washington, D.C.
Re: Proposed CFTC Cross-Border Releases on Swap Regulations
Dear Chairman Gensler,
We would like to share our views and concerns regarding the impacts
of cross-border application of certain swaps provisions of the
Commodity Exchange Act (CEA). as a result of our assessment of the
proposed interpretive guidance issued by the CFTC.
(1) Registration as a Swap Dealer or as a Major Swap Participant
According to preliminary data, some Brazilian financial entities
will exceed the de minimis threshold and be required to register as
swap dealers (SD) or as a major swap participants (MSP) and, therefore,
to comply with the relevant rules.
The additional regulatory burden, associated with the CFTC
oversight of activities already regulated in Brazil, as we have been
told, might discourage Brazilian institutions from trading swaps with
many active U.S. persons in our market, with potential impact on market
liquidity.
The regulatory overlap might not only make it more difficult for
Brazilian authorities to address local market problems or to deal with
troubled institutions, but also create a burdensome environment in a
time of slow global growth.
(2) Substituted Compliance
The proposed approach for a substituted compliance mechanism has
several limitations.
Rather than acknowledging the comparability of the foreign regime
as a whole, applications for substituted compliance must be submitted
by any individual firm registered as a SD or as a MSP. This approach is
likely to impose unnecessary costs and burdens on individual firms in
complying with the rules under the CEA. Also. it remains unclear
whether the foreign applicant will be able to dispute any of the
Commission's findings in terms of comparability assessments.
With regard to G20 members, an alternative to the proposed
substituted compliance approach would be a CFTC presumption that
countries that have implemented the G20 commitments have an adequate
regulatory regime for the purposes of ``substitute compliance'' or
``equivalence''. The various implementation reviews that the FSB, IOSCO
and other bodies have set up could be used as an input in this process.
It is worthy to mention that Brazilian rules are stricter and
provide more protection to stability than the requirements set forth in
other jurisdictions. To mention some examples, we could point out the
fact that, in Brazil:
(i) the final beneficial owner is identifiable at all levels of the
holding chain, allowing for accurate and up-to-date monitoring
of exposures per market participant, on a daily basis; and that
(ii) over 90% of all derivatives are exchange-traded and cleared at
a central counterparty clearing, providing unparalleled
systemic risk mitigation.
Last, the ``transaction-level requirements'', as we understood, are
not eligible for substituted compliance. In our opinion, the relevant
rules. along with the features pertaining to other jurisdictions (such
as mandatory central counterparty clearing and margin requirements),
can lead to inefficient results. In this sense, we find it relevant
that the particularities of a foreign regime be taken into
consideration also in relation to the ``transaction-level
requirements''.
(3) Privacy and Data Protection Issues
Another area of concern relates to privacy and data protection
issues, since substituted compliance relative to Swap Data Repository
(SDR) reporting is only permitted if the CFTC is able to access the
required information stored in the SDR. This approach may conflict with
Brazilian bank secrecy rules set out in Law 105 of 2001. The Market
Authority (CVM) has powers to share information protected by bank
secrecy rules in cases of enforcement, but there are no previous cases
of information sharing in cases of market supervision. In this context,
Brazilian entities may be prevented from providing more detailed
information requested by the CFTC.
Even in the cases of market participants that are exempt from the
registration as a SD or as a MSP, our concerns relative to bank secrecy
rules remain, since SDR reporting rules also apply in such cases.
We thank you for your consideration and should you have any
questions concerning the issues we have raised, please do not hesitate
to contact us.
Yours sincerely,
Otavio Yazbek, Chairman, Comissao de Valores Mobiiarios.
______
17 October 2012
Hon. Gary Gensler,
Chairman,
Commodity Futures Trading Commission,
Washington, D.C.
U.S. Cross Border Swaps Rules
Dear Chairman Gensler,
We, the undersigned, would like to share our concerns with you
about the implementation of the current phase of post-crisis regulatory
reform, as you reflect on the final shape of the CFTC cross-border
rules for swaps.
Faithfully implementing the reforms adopted by the G20 in 2009 in
Pittsburgh on the clearing and electronic trading of standardised OTC
derivatives in a non-discriminatory way remains of the utmost
importance. As you know, Europe has adopted legislation on clearing and
is in the final stages of negotiation on the trading aspect of the G20
Pittsburgh reforms. In Japan, clearing requirements will be effective
in November and legislation on trading platforms was recently approved
by the Diet. While there may be differences in some areas of detail, we
believe the U.S., the Member States of the EU and Japan are now set to
implement these historic reforms in a broadly consistent way in our
respective jurisdictions.
This is a significant achievement, capturing the large majority of
the global swaps market. But as has been continuously stressed by G20
leaders since 2009, domestic legislation alone does not fulfil the
political aim that was agreed in Pittsburgh and reaffirmed in Toronto
in 2010. Regulation across the G20 needs to be carefully implemented in
a harmonised way that does not risk fragmenting vital global financial
markets.
For all its past faults, the derivatives market has allowed
financial counterparties across the globe to come together to conduct
more effective risk management and, as a result support economic
development. Done properly this should be of benefit to all. At a time
of highly fragile economic growth, we believe that it is critical to
avoid taking steps that risk a withdrawal from global financial markets
into inevitably less efficient regional or national markets.
We of course recognise and understand the need for U.S. and other
regulators to satisfy themselves on the adequacy of regulation in other
jurisdictions. But we would urge you before finalising any rules, or
enforcing any deadlines, to take the time to ensure that U.S.
rulemaking works not just domestically but also globally. We should
collectively adopt cross-border rules consistent with the principle
that equivalence or substituted compliance with respect to partner
jurisdictions, and consequential reliance on the regulation and
supervision within those jurisdictions, should be used as far as
possible to avoid fragmentation of global markets. Specifically, this
principle needs to be enshrined in CFTC cross-border rules, so that all
U.S. persons wherever they are located can transact with non-U.S.
entities using a proportionate substituted compliance regime.
We assure you our regulatory authorities stand ready to work
closely with you to ensure an effective cross-border regime is
implemented at the earliest possible opportunity and provide you with
the necessary information and reassurance regarding our respective
regulatory frameworks.
Yours sincerely,
George Osborne, Michel Barnier,
Chancellor of the Exchequer, Commissioner for Internal Market
European Commission; and Services,
UK Government;
Ikko Nakatsuka, Pierre Moscovici
Minister of State for Financial Minister of Finance,
Services,
Government of Japan; Government of France.
______
Submitted Letter by Hon. Randy Neugebauer, a Representative in Congress
from Texas
December 20, 2012
Hon. K. Michael Conaway,
Chairman,
Subcommittee on General Farm Commodities and Risk Management,
House Committee on Agriculture,
Washington, D.C.
Dear Chairman Conaway,
Last week, the Subcommittee on General Farm Commodities and Risk
Management held a hearing titled ``Dodd-Frank Derivatives Reform:
Challenges Facing U.S. and International Markets.'' During the hearing,
one of the CFTC witnesses indicated that the CFTC is drafting a new
position limits rule and will appeal the D.C. District Court's decision
vacating a previous version of the rule.
I am concerned that the rule fails to distinguish between
speculators on the one hand and certain broadly diversified, passive
index funds on the other. Inappropriately applying position limits to
such funds could significantly reduce investor access to commodity
markets, shrink market liquidity, impede price discovery, and
destabilize the market.
The potential for such unintended consequences is so significant
that the then-Chairwoman of the Senate Agriculture Committee, Blanche
Lincoln, a primary author of what became Title VII of the Dodd-Frank
Act, was compelled to send the enclosed letter to the CFTC. This letter
constitutes the clearest expression of legislative history in this
area, and I therefore ask that it be made a part of the official
hearing record.
Best regards,
Hon. Randy Neugebauer.
attachment
December 16, 2010
Hon. Gary Gensler,
Chairman,
Commodity Futures Trading Commission,
Washington, D.C.
Re: CFTC's Implementation of Position Limits
Dear Chairman Gensler:
I am writing in regard to the expanded powers granted by the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank'')
to the Commodity Futures Trading Commission (``CFTC'') with respect to
position limits. As you know, the CFTC is authorized to set aggregate
position limits ``as appropriate'' across all markets. In the past, the
CFTC has examined position limits as a means of preventing excessive
speculation or sudden price fluctuations in the commodities markets. I
support this authority. Going forward, I urge the CFTC to continue to
keep these important twin goals in mind as it considers and initially
sets position limits, so that investors who are fully collateralized
and may pose little or no systemic risk are not arbitrarily limited and
that we do not negatively impact valuable market liquidity.
I am mindful of the CFTC's discretion to set aggregate position
limits by ``group or class of traders.'' Further, Dodd-Frank encourages
the CFTC to consider how position limits may impact particular classes
of persons or swaps. As the CFTC seeks to implement position limits, I
urge the CFTC not to unnecessarily disadvantage market participants
that invest in diversified and unleveraged commodity indices. These
investors often serve as an important, fully collateralized source of
liquidity. At the same time, they are natural counterparties to
producers who are seeking to reduce their commodity price risk. In this
vein, as I have said previously, it is ``my expectation that the CFTC
will address the soundness of prudential investing by pension funds,
index funds and other institutional investors in unleveraged indices of
commodities that may also serve to provide agricultural and other
commodity contracts with the necessary liquidity to assist in price
discovery and hedging for the commercial users of such contracts.''
In addition to enhancing liquidity and facilitating greater price
discovery for commercial end-users, diversified, unleveraged index
funds are an effective way to diversify their portfolios and hedge
against inflation. Unnecessary position limits placed on mutual fund
investors could limit their investment options, potentially
substantially reduce market liquidity, and impede price discovery. Such
limits might also have the unintended consequence of forcing investors
to rely on higher-cost managers with little experience, insufficient
compliance and trade flow infrastructure, and limited risk management
capabilities associated with effectively managing commodity index risk.
Such a comprehensive approach to setting position limits would not
be contrary to the public interest or to the purposes of the Commodity
Exchange Act and Dodd-Frank. In drafting the position limits provision,
Congress sought to eliminate excessive speculation and market
manipulation while protecting the efficiency of the markets.
Consequently, as Chairman of the Senate Committee on Agriculture,
Nutrition, and Forestry, I encouraged the CFTC to differentiate between
``trading activity that is unleveraged or fully collateralized, solely
exchange-traded, fully transparent, clearinghouse guaranteed, and poses
no systemic risk'' and highly leveraged swaps trading in its
implementation of position limits.
I repeat my request again today. As it contemplates position
limits, I encourage the CFTC to carefully consider how such limits may
impact particular types of investment vehicles and classes of
investors. I hope that the CFTC will implement position limits in a
manner that protects ordinary investors and ensures that the commodity
markets continue to benefit from the liquidity and price stability
provided by unleveraged broad-based index investments.
Sincerely,
Senator Blanche L. Lincoln,
Chairman,
Committee on Agriculture, Nutrition, and Forestry.
______
Submitted Statement by Hon. David Scott, a Representative in Congress
from Georgia; on Behalf of Americans for Financial Reform
Today's hearing deals with the question of the cross-border or
extra-territorial application of the Dodd-Frank Act's derivatives
provisions. Americans for Financial Reform has previously commented on
this issue in detail to the Commodity Futures Trading Commission
(CFTC).\1\ However, for the purposes of the hearing AFR would like to
provide a summary of key points.\2\
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\1\ See Americans for Financial Reform, ``Comment Letter On The
Cross-Border Applications of Certain Provisions of the Dodd-Frank
Act'', August 27, 2012. Available at http://ourfinancialsecurity.org/
blogs/wp-content/ourfinancialsecurity.org/uploads/2012/08/AFR-CFTC-
Cross-Border-Comment-letter-8-27-12.pdf.
\2\ AFR is a coalition of more than 250 national, state, local
groups who have come together to advocate for reform of the financial
sector. Members of the AFR include consumer, civil rights, investor,
retiree, labor, religious and business groups along with prominent
independent experts.
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Strong extra-territorial enforcement of derivatives reforms is
absolutely central to protecting the U.S. economy and U.S. taxpayers
from the risks of unregulated derivatives markets. In recent months,
large international banks and in some cases foreign regulators have
opposed effective cross-border application of U.S. derivatives
regulation. In evaluating this opposition, several key points must be
kept in mind:
The largest global banks can shift derivatives risks and
funding between thousands of international subsidiaries at the
touch of a computer keyboard. It is therefore impossible to
effectively regulate derivatives markets without applying rules
to transactions conducted through foreign subsidiaries. Without
cross-border applicability, there is no effective regulation of
derivatives.
Many non-U.S. jurisdictions, particularly in Europe, lag
years behind the United States in implementing derivatives
protections. Delaying the application of derivatives rules
until they are completed in every jurisdiction could create an
open-ended delay of multiple years in regulating U.S.
derivatives markets. Four years after the financial crisis and
2 years after the passage of the Dodd-Frank Act, we cannot
afford further multi-year delays in effectively regulating our
financial markets.
The application of derivatives safeguards to the global
operations of U.S. banks does not represent a competitive
threat to the U.S. economy. Indeed, these safeguards will
benefit the economy and taxpayers by preserving financial
stability, and will reduce incentives for the outsourcing of
U.S. jobs to foreign regulatory havens. The profits of Wall
Street subsidiaries in London or Singapore must not be
prioritized over the interests of U.S. taxpayers.
None of these points mean that regulators should not take
reasonable and responsible steps to accommodate differences in
international regulatory regimes. But cross-border issues must not
become an excuse for disguised deregulation.
Without Cross-Border Applicability, There is No Effective Derivatives
Regulation
Modern financial markets are inherently global in scope. Profits
and losses experienced in overseas affiliates return to affect the
parent company and the U.S. economy.
We have learned this lesson in many crises, most recently in the
massive derivatives losses experienced at JP Morgan's London office,
and most painfully in the world financial collapse of 2008. Nowhere is
the globalization of financial markets more evident than in the
derivatives market. As CFTC Chair Gary Gensler has stated with respect
to the extraterritoriality issue:
``Swaps executed offshore by U.S. financial institutions can
send risk straight back to our shores. It was true with the
London and Cayman Islands affiliates of AIG, Lehman Brothers,
Citigroup and Bear Stearns. A decade earlier, it was true, as
well, with Long-Term Capital Management. The nature of modern
finance is that large financial institutions set up hundreds,
if not thousands of `legal entities' around the globe . . .
Many of these far-flung legal entities, however, are still
highly connected back to their U.S. affiliates.''
Chairman Gensler's statements are confirmed by extensive experience
and data. Bloomberg News has documented that large Wall Street banks
routinely transact well over \1/2\ of their swaps business through
foreign subsidiaries.\3\ Furthermore, these large institutions manage
their revenues as integrated global entities, making little distinction
based on the locations of gains and losses. As Professor Richard
Herring of the Wharton School has stated: \4\
---------------------------------------------------------------------------
\3\ See Brush, Silla, ``Goldman Sachs Among Banks Lobbying To
Exempt Half of Swaps From Dodd Frank'' (http://www.bloomberg.com/news/
2012-01-30/goldman-sachs-among-banks-lobbying-to-exempt-half-of-swaps-
from-dodd-frank.html), Bloomberg News, January 30, 2012.
\4\ Page 217, Herring, R. and J. Carmassi, ``The Structure of
International Financial Conglomerates: Complexity and Its Implications
for Systemic Risk,'' Chapter 8 in the Oxford Handbook of Banking,
edited by A. Berger, D. Molyneux, and J. Wilson, Oxford University
Press, 2010.
``Despite their corporate complexity, LCFIs [Large Complex
Financial Institutions] tend to be managed in an integrated
fashion along lines of business with only minimal regard for
legal entities, national borders or functional regulatory
authorities. Moreover, there are often substantial
interconnections among the separate entities within the
---------------------------------------------------------------------------
financial group.''
Exempting derivatives transactions conducted through international
subsidiaries from Dodd-Frank requirements would make central
derivatives reforms unenforceable. U.S. companies could simply route
their derivatives transactions through foreign subsidiaries, evading
regulation, and then transfer cash flows back to the U.S. parent
company. Such transfers would be simple for the institutions, because
as the above quote points out, major Wall Street banks are managed as
global entities. It is well known and well documented that major banks,
like other international corporations, manage liquidity on a global
scale and freely move funding across borders in response to the needs
of various subsidiaries and the home office.\5\ Revenues from global
subsidiaries are generally swept back to the central corporate treasury
for distribution, often on a daily basis. Professor Herring has
described how this process worked at Lehmann Brothers, and how it
complicated attempts at resolution of the bank: \6\
---------------------------------------------------------------------------
\5\ For one of many recent studies documenting this, see e.g.,
Cetorelli, N. and Goldberg, L., ``Banking Globalization, Monetary
Transmission, and the Lending Channel'' (http://www.newyorkfed.org/
research/economists/cetorelli/Cetorelli_Goldberg_final.pdf),
Forthcoming, Journal of Finance.
\6\ Page 225, Herring, R. and J. Carmassi, ``The Structure of
International Financial Conglomerates: Complexity and Its Implications
for Systemic Risk,'' Chapter 8 in the Oxford Handbook of Banking,
edited by A. Berger, D. Molyneux, and J. Wilson, Oxford University
Press, 2010.
``But the fundamental problem was that LB [Lehman Brothers] was
managed as an integrated entity with minimal regard for the
legal entities that would need to be taken through the
bankruptcy process. LBHI [Lehman Brothers Holdings,
Incorporated] issued the vast majority of unsecured debt and
invested the funds in most of its regulated and unregulated
subsidiaries. This is a common approach to managing a global
corporation, designed to facilitate control over global
operations, while reducing funding, capital and tax costs . . .
LBHI lent to its operating subsidiaries at the beginning of
each day and then swept the cash back to LBHI at the end of
---------------------------------------------------------------------------
each day.''
Exempting any of the subsidiaries of a global bank from derivatives
oversight could thus effectively allow banks to avoid regulation on any
derivatives transactions they chose. This would perpetuate the
unregulated derivatives markets that were at the heart of the financial
crisis, and undermine the core purposes of Title VII of the Dodd-Frank
Act. The failure to properly enforce derivatives reforms
internationally would expose U.S. taxpayers to the risks of a financial
crisis triggered by unregulated derivatives activities conducted in
foreign regulatory havens.
U.S. Rules Must Not Be Delayed Until The Rest of the World Has
Equivalent Rules
All of the G20 nations have agreed in principle to a similar set of
derivatives reforms, including requirements for central clearing,
transparency, and exchange trading. In 2009 the G20 nations jointly
committed to implementing these reforms by the close of 2012.\7\
Unfortunately, other countries lag well behind the United States in
meeting that deadline. The latest reports from Europe are that
implementation of European Union derivatives rules will be delayed
until at least mid-2014.\8\
---------------------------------------------------------------------------
\7\ See Financial Stability Board, ``Progress of Financial
Regulatory Reforms'' (http://www.financialstabilityboard.org/
publications/r_120420a.pdf), April 16, 2012.
\8\ Stafford, Phillip, ``Europe Dallies on Derivatives Regulation''
(http://www.ft.com/intl/cms/s/0/8ff948ec-3e10-11e2-93cb-
00144feabdc0.html), Financial Times, December 4, 2012.
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The CFTC has already proposed to delay extraterritorial application
of many U.S. derivatives rules through mid-2013 in order to accommodate
the concerns of foreign regulators. But creating further open-ended
delays in U.S. derivatives rules will leave U.S. taxpayers exposed to
risks taken in foreign subsidiaries of Wall Street banks for many years
to come. Over 2 years have passed since the Dodd-Frank Act became law,
and further delays in implementing derivatives rules are unacceptable.
The effort to postpone full implementation of U.S. derivatives reforms
until some indefinite date when other nations complete their rules is
just the latest of a set of delaying tactics that have been used by
large banks to prevent completion of financial reforms.
Timely Implementation of Derivatives Reforms Is Not a Threat to U.S.
Competitiveness
Some in the financial industry have argued that U.S. implementation
of derivatives reforms is a threat to competitiveness. The claim is
that foreign entities will refuse to engage in derivatives business
with the foreign subsidiaries of U.S. banks if they know that such
transactions will subject them to new requirements such as clearing,
exchange trading, and capital requirements. In addition, foreign banks
in Europe and other jurisdictions may refuse to do derivatives
transactions with U.S. commercial counterparties if this would subject
them to registration as a swaps dealer in U.S. markets.
These arguments are deeply misguided, for several reasons. First,
they appear to prioritize the profits of financial entities located in
foreign countries over the creation of U.S. jobs and the stability of
the U.S. economy. It would be a grave error to expose the U.S. economy
to the risk of financial instability simply so that the Singapore or
London subsidiary of a Wall Street bank can do unregulated derivatives
transactions with foreign counterparties. This is especially true since
an exemption for foreign subsidiaries would tend to benefit the economy
of the foreign jurisdiction where those subsidiaries are located at the
expense of the United States. Likewise, creating exemptions that permit
U.S. commercial counterparties to perform unregulated derivatives
transactions with foreign banks would privilege those foreign banks
above regulated U.S. institutions.
Industry arguments also ignore the benefits of global leadership in
derivatives reform. As discussed above, the major G20 nations have all
agreed to implement derivatives reforms similar to those proposed in
the Dodd-Frank Act. While these reforms have been delayed in other
nations, in the long term we can expect that they will eventually be
implemented in most jurisdictions. As the global derivatives market
transitions toward greater oversight, ensuring that U.S. companies have
a head start and greater experience in complying with the rules should
eventually result in a competitive advantage for U.S. firms. And in the
case of any foreign jurisdictions which defy the G20 consensus and
refuse to implement derivatives reform, we should clearly act to
prevent exposure of the U.S. financial system to unregulated
transactions in these jurisdictions.
Finally, the argument ignores the potential competitive advantages
to be gained by improving the stability and reliability of U.S.
derivatives markets through new reforms. Derivatives reforms require
better risk management and greater loss reserves. These changes will
mean that U.S. banks will provide more protection and stability for
derivatives counterparties and customers, which is a competitive
advantage. The U.S. financial sector has gained its international
reputation due to our global leadership in creating stable and
transparent markets. Indeed, it was over 150 years ago that the U.S.
pioneered the derivatives clearinghouse. This was a major positive
innovation in establishing robust and valuable marketplaces for
commodities as well as key financial markets. Although permitting
regulatory loopholes such as extra-territorial exemptions may create
short-term profits, in the long run the greatest threat to the U.S.
competitive edge is a repetition of the deregulation that led to the
disastrous financial crisis of 2008.
Any `Substituted Compliance' Regime Must Ensure That Foreign Rules Are
Truly Comparable To U.S. Rules
The CFTC has indicated that it will permit `substituted compliance'
with U.S. derivatives rules. Under substituted compliance, foreign
subsidiaries of U.S. banks (and in some cases subsidiaries of foreign
banks dealing with U.S. persons) will be able to satisfy U.S.
requirements by complying with the rules in their local jurisdiction.
The danger raised by substituted compliance is that banks may seek
out locations where regulation is weak and then attempt to use the
inadequate foreign regulations to satisfy U.S. requirements. This means
that it is crucial that any substituted compliance regime be strictly
limited to jurisdictions that have genuinely comparable rules to the
U.S. both in nature and in enforcement. Otherwise, we will see the
emergence of regulatory havens that play a role similar to the role the
Cayman Islands and other offshore jurisdictions have played as tax
havens. Unless it is backed up by a real and thorough process to
determine genuine comparability between regulatory regimes, substituted
compliance is simply a form of disguised deregulation.
Regulators must maintain a commitment to genuine comparability
determination using a thorough process that carefully compares both the
nature and enforcement of rules in foreign jurisdictions to those of
the United States. Some in industry have called for a `principles
based' comparability procedure, where substituted compliance is
permitted in any jurisdiction that has agreed in principle to oversee
derivatives markets. Such calls for `principle based' comparability are
simply an effort at backdoor deregulation, as they do not ensure that
regulations are genuinely equivalent.
Clearly there can be no substituted compliance until foreign
jurisdictions actually complete and implement their rules. Foreign
rules cannot be substituted for U.S. rules where foreign rules do not
yet exist. As discussed above, foreign jurisdictions lag years behind
the U.S. in implementing derivatives rules. The U.S. must therefore be
prepared to implement derivatives reforms rapidly and institute any
substituted compliance at a later date, once foreign governments have
fully implemented their rules.
ATTACHMENT
Following are the Partners of Americans for Financial Reform
All the organizations support the overall principles of AFR and are
working for an accountable, fair and secure financial system. Not all
of these organizations work on all of the issues covered by the
coalition or have signed on to every statement.
A New Way Forward
AFL-CIO
AFSCME
Alliance For Justice
American Income Life Insurance
American Sustainable Business Council
Americans for Democratic Action, Inc
Americans United for Change
Campaign for America's Future
Campaign Money
Center for Digital Democracy
Center for Economic and Policy Research
Center for Economic Progress
Center for Media and Democracy
Center for Responsible Lending
Center for Justice and Democracy
Center of Concern
Change to Win
Clean Yield Asset Management
Coastal Enterprises Inc.
Color of Change
Common Cause
Communications Workers of America
Community Development Transportation Lending Services
Consumer Action
Consumer Association Council
Consumers for Auto Safety and Reliability
Consumer Federation of America
Consumer Watchdog
Consumers Union
Corporation for Enterprise Development
CREDO Mobile
CTW Investment Group
Demos
Economic Policy Institute
Essential Action
Greenlining Institute
Good Business International
HNMA Funding Company
Home Actions
Housing Counseling Services
Home Defender's League
Information Press
Institute for Global Communications
Institute for Policy Studies: Global Economy Project
International Brotherhood of Teamsters
Institute of Women's Policy Research
Krull & Company
Laborers' International Union of North America
Lake Research Partners
Lawyers' Committee for Civil Rights Under Law
Move On
NAACP
NASCAT
National Association of Consumer Advocates
National Association of Neighborhoods
National Community Reinvestment Coalition
National Consumer Law Center (on behalf of its low-income clients)
National Consumers League
National Council of La Raza
National Fair Housing Alliance
National Federation of Community Development Credit Unions
National Housing Resource Center
National Housing Trust
National Housing Trust Community Development Fund
National NeighborWorks Association
National Nurses United
National People's Action
National Council of Women's Organizations
Next Step
OMB Watch
OpenTheGovernment.org
Opportunity Finance Network
Partners for the Common Good
PICO National Network
Progress Now Action
Progressive States Network
Poverty and Race Research Action Council
Public Citizen
Sargent Shriver Center on Poverty Law
SEIU
State Voices
Taxpayer's for Common Sense
The Association for Housing and Neighborhood Development
The Fuel Savers Club
The Leadership Conference on Civil and Human Rights
The Seminal
TICAS
U.S. Public Interest Research Group
UNITE HERE
United Food and Commercial Workers
United States Student Association
USAction
Veris Wealth Partners
Western States Center
We the People Now
Woodstock Institute
World Privacy Forum
UNET
Union Plus
Unitarian Universalist for a Just Economic Community
List of State and Local Affiliates
Alaska PIRG
Arizona PIRG
Arizona Advocacy Network
Arizonans For Responsible Lending
Association for Neighborhood and Housing Development NY
Audubon Partnership for Economic Development LDC, New York NY
BAC Funding Consortium Inc., Miami FL
Beech Capital Venture Corporation, Philadelphia PA
California PIRG
California Reinvestment Coalition
Century Housing Corporation, Culver City CA
CHANGER NY
Chautauqua Home Rehabilitation and Improvement Corporation (NY)
Chicago Community Loan Fund, Chicago IL
Chicago Community Ventures, Chicago IL
Chicago Consumer Coalition
Citizen Potawatomi CDC, Shawnee OK
Colorado PIRG
Coalition on Homeless Housing in Ohio
Community Capital Fund, Bridgeport CT
Community Capital of Maryland, Baltimore MD
Community Development Financial Institution of the Tohono O'odham
Nation, Sells AZ
Community Redevelopment Loan and Investment Fund, Atlanta GA
Community Reinvestment Association of North Carolina
Community Resource Group, Fayetteville A
Connecticut PIRG
Consumer Assistance Council
Cooper Square Committee (NYC)
Cooperative Fund of New England, Wilmington NC
Corporacion de Desarrollo Economico de Ceiba, Ceiba PR
Delta Foundation, Inc., Greenville MS
Economic Opportunity Fund (EOF), Philadelphia PA
Empire Justice Center NY
Empowering and Strengthening Ohio's People (ESOP), Cleveland OH
Enterprises, Inc., Berea KY
Fair Housing Contact Service OH
Federation of Appalachian Housing
Fitness and Praise Youth Development, Inc., Baton Rouge LA
Florida Consumer Action Network
Florida PIRG
Funding Partners for Housing Solutions, Ft. Collins CO
Georgia PIRG
Grow Iowa Foundation, Greenfield IA
Homewise, Inc., Santa Fe NM
Idaho Nevada CDFI, Pocatello ID
Idaho Chapter, National Association of Social Workers
Illinois PIRG
Impact Capital, Seattle WA
Indiana PIRG
Iowa PIRG
Iowa Citizens for Community Improvement
JobStart Chautauqua, Inc., Mayville NY
La Casa Federal Credit Union, Newark NJ
Low Income Investment Fund, San Francisco CA
Long Island Housing Services NY
MaineStream Finance, Bangor ME
Maryland PIRG
Massachusetts Consumers' Coalition
MASSPIRG
Massachusetts Fair Housing Center
Michigan PIRG
Midland Community Development Corporation, Midland TX
Midwest Minnesota Community Development Corporation, Detroit Lakes
MN
Mile High Community Loan Fund, Denver CO
Missouri PIRG
Mortgage Recovery Service Center of L.A.
Montana Community Development Corporation, Missoula MT
Montana PIRG
Neighborhood Economic Development Advocacy Project
New Hampshire PIRG
New Jersey Community Capital, Trenton NJ
New Jersey Citizen Action
New Jersey PIRG
New Mexico PIRG
New York PIRG
New York City Aids Housing Network
New Yorkers for Responsible Lending
NOAH Community Development Fund, Inc., Boston MA
Nonprofit Finance Fund, New York NY
Nonprofits Assistance Fund, Minneapolis M
North Carolina PIRG
Northside Community Development Fund, Pittsburgh PA
Ohio Capital Corporation for Housing, Columbus OH
Ohio PIRG
OligarchyUSA
Oregon State PIRG
Our Oregon
PennPIRG
Piedmont Housing Alliance, Charlottesville VA
Michigan PIRG
Rocky Mountain Peace and Justice Center, CO
Rhode Island PIRG
Rural Community Assistance Corporation, West Sacramento CA
Rural Organizing Project OR
San Francisco Municipal Transportation Authority
Seattle Economic Development Fund
Community Capital Development
TexPIRG
The Fair Housing Council of Central New York
The Loan Fund, Albuquerque NM
Third Reconstruction Institute NC
Vermont PIRG
Village Capital Corporation, Cleveland OH
Virginia Citizens Consumer Council
Virginia Poverty Law Center
War on Poverty--Florida
WashPIRG
Westchester Residential Opportunities Inc.
Wigamig Owners Loan Fund, Inc., Lac du Flambeau WI
WISPIRG
Small Businesses
Blu
Bowden-Gill Environmental
Community MedPAC
Diversified Environmental Planning
Hayden & Craig, PLLC
Mid City Animal Hospital, Pheonix AZ
The Holographic Repatterning Institute at Austin
UNET