Download to read the full letter Secretary of the Commodity Futures Trading Commission.
The Institute for Agriculture and Trade Policy (IATP) appreciates this opportunity to comment on the Commission’s above captioned proposed Cross-Border Rule. Because it is a common industry practice for Swaps Dealers (SDs) to arrange and market swaps in the United States and trade them through their foreign subsidiaries or affiliates, it is crucial that this normal commercial practice not result in foreign subsidiary swaps activities that evade compliance with Commission requirements. The Cross-Border Rule must enable the Commission to implement and, as appropriate, enforce its requirements while allowing the foreign subsidiaries and affiliates of U.S. ultimate parents to execute and clear swaps transactions in foreign venues. The Commission grants substitute compliance with Commission requirements for foreign regulatory regimes, trade associations and swap entities in non-U.S. jurisdictions to enable cross border swaps activities. However, the Commission must have the means to verify that the foreign affiliate and subsidiary swaps activities do not violate grants of substitute compliance and hence, the cross-border provisions of the Commodity Exchange Act (CEA) and the Dodd Frank Wall Street Reform and Consumer Financial Protection Act (Dodd Frank Act). The following comment aims to assist the Commission in achieving that means to verify that the granting of substituted compliance continues to comply with CEA and Dodd Frank Act authorized requirements.
- The Proposed Rule rejects the plain language of Dodd Frank Act amended CEA authority to regulate cross border swaps activities and interprets that authority according a standard derived from Foreign Trade Antitrust Improvement Acts of 1982 case law. Since nothing in the Proposed Rule is stipulated to prevent the unreasonable restraint of trade by the four major SDs, the use of an anti-trust standard to interpret the plain language of Dodd Frank seems disingenuous and can only impede the structuring of a robust Cross-Border Rule.
- The Proposed Rule’s weakly documented and perfunctory references to international “regulatory developments” and “market developments” are insufficient grounds for the Commission to withdraw the 2016 Proposed Cross Border Rule.
- The Proposed Rule relies on swaps related concepts of the Securities and Exchange Commission (SEC). The Commission proposes adopting the SEC definition of “U.S. Person” for mostly domestically traded security-based swaps and inappropriately applying that definition for the far larger and more diverse universe of globally traded financial and physical commodity swaps.
- The Proposed Rule in effect replaces the Foreign Consolidated Subsidiary (FCS) category of the 2016 Proposed Rule with the concept of a Significant Risk Subsidiary (SRS) “borrowed” from the SEC (Federal Register (FR) Vol. 85, No. 5, January 8, 2020, Proposed Rules, at p. 965). The FCS is defined by a swaps activity audit trail that can be followed from foreign affiliate swaps trading data to the U.S. ultimate parent by a well-resourced and authorized Chief Compliance Officer (see IATP’s comment on the Commission’s proposed provisions in swaps management to weaken the authority and autonomy of the CCO). The SRS is defined in such a way as to exclude the swaps activities of most foreign affiliates that, in aggregate, could have the CEA’s stipulated “direct and significant” impact on the U.S. ultimate parent, and on the U.S. economy.
- This Proposed Rule relies, in the interest of “international comity,” on deference to foreign regulators to regulate the foreign swaps activities of U.S. ultimate parent firms. The proposed regulatory form of the deference principle — “holistic” and “flexible” comparability determinations for substitute compliance with CEA requirements and Dodd Frank Act objectives — abandons the “comprehensiveness” criterion of the 2013 Guidance comparability determination process. “Holistic” comparability definitions may grant substitute compliance for jurisdictions and swaps entities lacking a comprehensive swaps regulatory regime.
- IATP is not able to respond to most Commission’s questions concerning definitions, exclusions and exemptions in the proposed Cross Border Rule.
- However, the exemptions and exclusions of swaps activities to be counted towards the threshold for registering under the Swaps Dealer and the SEC restrictive “U.S. Person” definition will likely hinder CFTC staff surveillance of cross border swaps trade data and increase the difficulty of market participants to determine whether they comply with the proposed Cross Border Rule.
- Consequent to this summary and the following remarks, IATP urges the Commission to set aside this Proposed Rule and use the 2016 Proposed Rule and the 2013 Guidance on cross border swaps activities as the basis for finalizing a new proposed rule.
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