CFTC Commissioner Quintenz Supports Revised Cross-Border Swaps Framework

CFTC Commissioner Brian Quintenz expressed support for an approach toward substituted compliance determinations that distinguishes between the rules designed to address systemic risk reforms and those designed to address market activities. The approach is consistent with an alternative cross-border swaps framework espoused by CFTC Chair J. Christopher Giancarlo in a recent white paper.

In remarks at FIA Asia 2018, Mr. Quintenz disagreed with recent criticism of the white paper by CFTC Commissioner Rostin Behnam. Mr. Behnam argued that Mr. Giancarlo should have expressed his views through formal, statutory procedures, as opposed to a white paper. Mr. Quintenz stated that the majority of CFTC Commissioners will "find a consensus on restructuring the agency's cross-border approach in the coming months."

Among other things, Mr. Quintenz supports:

• an approach toward substituted compliance determinations that distinguishes between the rules designed to address systemic risk reforms and those designed to address market activities;
• expanding the use of exemptive authority for non-U.S. central counterparties ("CCPs") that do not pose risks to the U.S. financial system, while CCPs posing a risk to the U.S. financial system should continue to be registered with the CFTC;
• the proposition that swaps trading venues subject to comparable regulation abroad should be exempt from swap execution facility ("SEF") registration with the CFTC;
• the proposition that U.S. persons should be permitted to access non-U.S. platforms in non-comparable jurisdictions without SEF registration "subject to materiality threshold"; and
• Mr. Giancarlo's approach to which transactions count for purposes of the swap dealer thresholds, noting in particular that "foreign consolidated subsidiaries" need only count their dealing activity with U.S. and U.S.-guaranteed persons (rather than all transactions).

Mr. Quintenz also considered "arranged, negotiated and executed" ("ANE") transactions. Mr. Quintenz said that it is a "credible proposition" that involvement of U.S. personnel in a trade should implicate some U.S.-based regulations. He urged the CFTC to consider whether its supervisory interest in a trade outweighs that of a non-U.S. regulator who has oversight of the counterparties. Mr. Quintenz advocated an ANE standard that focuses on client-facing sales and trading activity, rather than "incidental activity by U.S. personnel." He also said that any ANE standard must provide market participants with clarity with respect to which regulations will apply to swap transactions from the outset.

Commentary / StevenLofchie

While it would be a wonderful thing if the SEC and the CFTC could reach full agreement on a (sensible) cross-border regulatory approach, there are a few issues on which such agreement is particularly important to decreasing regulatory complexity: the definition of U.S. (non-U.S.) person; the situations in which the involvement of a U.S. agent in ANE for a foreign dealer results in the imposition of U.S. legal requirements; and just what U.S. legal requirements are imposed as a result of the U.S. agent's involvement.

Commentary / NihalPatel

Mr. Quintenz's speech is largely a defense of, and statement of agreement with, Mr. Giancarlo and his white paper. Two particular points of emphasis in his speech are notable:

• On CCP recognition, Mr. Quintenz supports modeling the CFTC approach on the way it has handled recognition of foreign CCPs in the futures context. In particular, Mr. Quintenz said that "given the professional nature of the swaps market," market participants can make a commercial decision whether to rely on U.S. or non-U.S. bankruptcy law protections. It is not obvious what impact the new optionality will have on U.S. futures commission merchants.
• On ANE transactions, Mr. Quintenz agreed with the policy suggestions of Mr. Giancarlo, but with significant caveats, including further consideration as to: (i) whether the standard can be made clear and administrable (Mr. Quintenz's speech uses bold font for "administrable" and that swap dealers "must" be able to operationalize the standard); (ii) the rules that actually apply to ANE transactions, and (iii) the appropriateness of using the systemic risk/market activity distinction for comparability analysis in certain contexts.

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