03 January 2014

CFTC issues extension to time-limited no-action letter on applicability of transaction-level requirements in certain cross-border situations

US regulators have said they will provide temporary relief to swap dealers affected by a November staff memo that expanded the scope of their power to regulate derivatives overseas.

The CFTC Divisions of Swap Dealer and Intermediary Oversight (DSIO), Clearing and Risk, and Market Oversight issued a time-limited no-action letter that extends relief to swap dealers (SDs) registered with the Commission that are established under the laws of jurisdictions other than the United States (non-US SDs) from certain transaction-level requirements under the Commodity Exchange Act.

On November 14, 2013, DSIO issued an Advisory (DSIO Advisory) in response to inquiries from swap market participants regarding the applicability of the Commission’s Transaction-Level Requirements in certain situations. Subsequent to the issuance of the DSIO Advisory, concerns were raised by certain non-US SDs regarding compliance with the Transaction-Level Requirements, who represented that, in order to avoid market disruption for their non-US counterparties, additional time would be necessary to come into compliance.

The groups argued that issuing guidance and advisories in lieu of formal rules violates a federal law that governs the process that many US agencies must follow before they can adopt new regulations. The federal law, known as the Administrative Procedures Act, requires agencies to seek public comments and properly weigh those comments before adopting any new regulations.

In their lawsuit, the Securities Industry and Financial Markets Association (SIFMA), the International Swaps and Derivatives Association (ISDA) and the Institute of International Bankers (IIB) said the November 14 memo was never publicly vetted or properly approved by a majority of the CFTC's commissioners.

In a sharply worded statement, the CFTC's lone Republican member Scott O'Malia dissented to the decision to seek comments, and accused the CFTC of trying to backpedal in the wake of the rulemaking flaws exposed by the recent lawsuit. "This is simply a strategic move by the Commission to try to duck blame for consistently circumventing the fundamental tenets of the (Administrative Procedures Act) and failing to adhere faithfully to the express congressional directive to limit the extraterritorial application" of the new swaps rules, he said. "It should be the goal of the Commission to develop rules that adhere to the APA and ensure proper regulatory oversight, transparency and promote competition in the derivatives space", he added.

The CFTC has requested public comment regarding compliance issues implicated by the DSIO Advisory. 

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Further reporting © Reuters

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