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Harmonization Between CFTC and SEC
Treasury recommends that the CFTC and the SEC undertake and give high priority to a joint effort to review their respective rulemakings in each key Title VII reform area. The goals of this exercise should be to harmonize rules and eliminate redundancies to the fullest extent possible and to minimize imposing distortive effects on the markets and duplicative and inconsistent compliance burdens on market participants.
- As part of this review, the SEC should finalize its Title VII rules with the goal of facilitating a well-harmonized swaps and security-based swaps regime.
- This effort should also include consideration of the prospects for alternative compliance regimes — for example, a framework of interagency substituted compliance or mutual recognition — for any areas in which effective harmonization is not feasible.
- Public comment should be part of this process.
Treasury recommends that Congress consider further action to achieve maximum harmonization in the regulation of swaps and security-based swaps.
Margin Requirements for Uncleared Swaps
Treasury recommends that U.S. regulators take steps to harmonize their margin requirements for uncleared swaps domestically and cooperate with non-U.S. jurisdictions that have implemented the Basel Committee on Banking Supervision-International Organization of Securities Commissions (BCBSIOSCO) framework to promote a level playing field for U.S. firms.
- The U.S. banking agencies should consider providing an exemption from the initial margin requirements for uncleared swaps for transactions between affiliates of a bank or bank holding company in a manner consistent with the margin requirements of the CFTC and the corresponding non-U.S. requirements, subject to appropriate conditions.
- The CFTC and U.S. banking regulators should work with their international counterparts to amend the uncleared margin framework so it is more appropriately tailored to the relevant risks.
- Where warranted based on logistical and operational considerations, the CFTC and the U.S. banking agencies should consider amendments to their rules to allow for more realistic time frames for collecting and posting margin.
- The CFTC and the U.S. banking regulators should reconsider the onesize-fits-all treatment of financial end users for purposes of margin on uncleared swaps and tailor their requirements to focus on the most significant source of risk.
- Consistent with these objectives, the SEC should repropose and finalize its proposed margin rule for uncleared security-based swaps in a manner that is aligned with the margin rules of the CFTC and the U.S. banking regulators.
CFTC Use of No-Action Letters
Treasury recommends that the CFTC take steps to simplify and formalize all outstanding staff guidance and no-action relief that has been used to smooth the implementation of the Dodd-Frank swaps regulatory framework. This should include, where necessary and appropriate, amendments to any final rules that have proven to be infeasible or unworkable, necessitating broadly applicable or multiyear no-action relief.
Cross-border Application and Scope: Treasury recommends that the CFTC and the SEC provide clarity around the cross-border scope of their regulations and make their rules compatible with non-U.S. jurisdictions where possible to avoid market fragmentation, redundancies, undue complexity, and conflicts of law. Examples of areas that merit reconsideration include:
- whether swap counterparties, trading platforms, and CCPs in jurisdictions compliant with international standards should be required to register with the CFTC or the SEC as a result of doing business with a U.S. firm’s foreign branch or affiliate;
- whether swap dealer registration should apply to a U.S. firm’s non-U.S. affiliate on the basis of trading with non-U.S. counterparties if the U.S. firm’s non-U.S. affiliate is effectively regulated as part of an appropriately robust regulatory regime or otherwise subject to Basel-compliant capital standards, regardless of whether the affiliate is guaranteed by its U.S. parent;
- whether U.S. firms’ foreign branches and affiliates, guaranteed or not, should be subject to Title VII’s mandatory clearing, mandatory trading, margin, or reporting rules when they trade with non-U.S. firms in jurisdictions compliant with international standards; and
- providing alternative ways for regulated entities to comply with requirements that may conflict with local privacy, blocking, and secrecy laws.
Substituted Compliance: Treasury recommends that effective cross-border cooperation include meaningful substituted compliance programs to minimize redundancies and conflicts.
- The CFTC and SEC should be judicious when applying their swaps rules to activities outside the United States and should permit entities, to the maximum extent practicable, to comply with comparable non-U.S. derivatives regulations, in lieu of complying with U.S. regulations.
- The CFTC and the SEC should adopt substituted compliance regimes that consider the rules of other jurisdictions, in an outcomes-based approach, in their entirety, rather than relying on rule-by-rule analysis. They should work toward achieving timely recognition of their regimes by non-U.S. regulatory authorities.
- The CFTC should undertake truly outcomes-based comparability determinations, using either a category-by-category comparison or a comparison of the CFTC regime to the foreign regime as a whole.
- Meaningful substituted compliance could also include consideration of recognition regimes for non-U.S. CCPs clearing derivatives for certain U.S. persons and for non-U.S. platforms for swaps trading.
ANE Transactions: Treasury recommends that the CFTC and the SEC reconsider any U.S. personnel test for applying the transaction-level requirements of their swaps rules.
- The CFTC should provide certainty to market participants regarding the guidance in the CFTC arrange, negotiate, execute (ANE) staff advisory (CFTC Letter No. 13-69), which has been subject to extended no-action relief, either by retracting the advisory or proceeding with a rulemaking.
- In particular, the CFTC and the SEC should reconsider the implications of applying their Title VII rules to transactions between non-U.S. firms or between a non-U.S. firm and a foreign branch or affiliate of a U.S. firm merely on the basis that U.S.-located personnel arrange, negotiate, or execute the swap, especially for entities in comparably regulated jurisdictions.
Capital Treatment in Support of Central Clearing
Treasury recommends that regulators properly balance the post-crisis goal of moving more derivatives into central clearing with appropriately tailored and targeted capital requirements.
- As a near-term measure, Treasury reiterates the recommendation of the Banking Report and calls for the deduction of initial margin for centrally cleared derivatives from the SLR denominator; and recommends a risk-adjusted approach for valuing options for purposes of the capital rules to better reflect the exposure, such as potentially weighting options by their delta.
- Beyond the near term, Treasury recommends that regulatory capital requirements transition from CEM to an adjusted SA-CCR calculation that provides an offset for initial margin and recognition of appropriate netting sets and hedged positions.
- In addition, Treasury recommends that U.S. banking regulators and market regulators conduct regular comprehensive assessments of how the capital and liquidity rules impact the incentives to centrally clear derivatives and whether such rules are properly calibrated.
Swap Dealer De Minimis Threshold
Treasury recommends that the CFTC maintain the swap dealer de minimis registration threshold at $8 billion, and establish that any future changes to the threshold will be subject to a formal rulemaking and public comment process.
Definition of Financial Entity
To provide regulatory certainty and better facilitate appropriate exceptions from the swaps clearing requirement for commercial end users engaged in bona fide hedging or mitigation of commercial risks, Treasury would support a legislative amendment to CEA Section 2(h)(7) providing the CFTC with rulemaking authority to modify and clarify the scope of the financial entity definition and the treatment of affiliates.
- Such authority should include consideration of non-prudentially regulated entities that currently fall under subclause VIII of CEA Section 2(h)(7)(c)(i) — i.e., entities that are “predominantly engaged… in activities that are financial in nature” — but which might warrant exception from the clearing requirement if they engage in swaps primarily to hedge or mitigate the business risks of a commercial affiliate.
- Such authority should also be flexible enough to permit, for example, the CFTC to formalize its no-action relief for central treasury units (CTUs) in a rulemaking.
- Further, any exceptions provided by the CFTC under such authority should be subject to appropriate conditions and allow the CFTC to appropriately monitor exempted activity. The conditions could include, for example, making the exception dependent on the size and nature of swaps activities, demonstration of risk-management requirements in lieu of clearing, and reporting requirements.
Any legislative amendment should provide the SEC analogous rulemaking authority under Exchange Act Section 3C(g) with respect to exceptions from the clearing requirement for security-based swaps.
Treasury recommends that the CFTC complete its position limits rules, as contemplated by its statutory mandate, with a focus on detecting and deterring market manipulation and other fraudulent behavior. Among the issues to consider in completing a final position limits rule, the CFTC should:
- ensure the appropriate availability of bona fide hedging exemptions for end users and explore whether to provide a risk management exemption;
- consider calibrating limits based on the risk of manipulation, for example, by imposing limits only for spot months of physical delivery contracts where the risk of potential market manipulation is greatest; and
- consider the deliverable supply holistically when setting the limits (e.g., for gold, consider the global physical market, not just U.S. futures).
SEF Execution Methods and MAT Process
Treasury recommends that the CFTC:
- consider rule changes to permit swap execution facilities (SEFs) to use any means of interstate commerce to execute swaps subject to a trade execution requirement that are consistent with the “multiple-to-multiple” element of the SEF definition (CEA Section 1a(50)). Such rule changes should be undertaken in recognition of the statutory goals of impartial access for market participants and promoting pre-trade price transparency in the swaps market;
- reevaluate the MAT determination process to ensure sufficient liquidity for swaps to support a mandatory trading requirement; and
- consider clarifying or eliminating footnote 88 in its final SEF rules to address associated market fragmentation.
Swap Data Reporting
Treasury supports the CFTC’s newly launched “Roadmap” effort, as announced in July 2017, to standardize reporting fields across products and SDRs, harmonize data elements and technical specifications with other regulators, and improve validation and quality control processes.
- Treasury recommends that the CFTC secure and commit adequate resources to complete the Roadmap review, undertake notice and comment rulemaking, and implement revised rules and harmonized standards within the timeframe outlined in the Roadmap.
- Treasury recommends that the CFTC leverage third-party and market participant expertise to the extent necessary to develop a coherent, efficient, and effective reporting regime.
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