CFTC Commissioner Brian Quintenz criticized prior CFTC leadership as having exceeded statutory authority in cross-border matters and urged the agency to mitigate market fragmentation through deference in regulatory oversight.
In a speech at the 2019 ISDA Annual Japan Conference, Mr. Quintenz stated that the key to reversing the "concerning trend toward market fragmentation" is for national regulators to recognize the sovereignty of other national regulators. However, he noted that, between 2011 and 2016, the CFTC took an expansive view of its authority. According to Mr. Quintenz, the CFTC did not follow the statutory directive from Congress: to only regulate external U.S. activities that "have a direct and significant connection" with the United States. Mr. Quintenz stated that the CFTC provided "actions, proposals, rules, guidance, or advisories" on activities that had a "direct" foreign-U.S. connection but were not "significant."
In particular, Mr. Quintenz criticized (i) a 2013 staff advisory on whether a swap is "arranged, negotiated or executed" in the United States (the "ANE transactions") and (ii) a proposal from 2016, that would have implemented aspects of the CFTC cross-border guidance and affected the treatment of "foreign consolidated subsidiaries" (or "FCS"). According to Mr. Quintenz, the CFTC transaction-level requirements should not apply to ANE transactions because they are between two non-U.S. persons. Instead, the transactions should be monitored by foreign firms and their local supervisory authorities. In regard to the treatment of FCS, Mr. Quintenz argued that while FCS activity may have a direct connection to the U.S. parent, that connection is not necessarily significant. He urged the CFTC to first assess whether an FCS's activities pose a potential risk to the United States by considering:
- the size of the U.S. parent entity and the risk it poses to U.S. commerce;
- how the size of the FCS compares to that of the parent;
- what encompasses the subsidiary's extraterritorial swaps activities; and
- whether the FCS is subject to either (i) supervision and regulation by another U.S. regulator or (ii) is in a jurisdiction with similar capital and margin requirements.
Commentary Nihal Patel
While there is no question the CFTC in the past took a more expansive view of extra territorial authority, things didn't magically change in 2017. These debates (particularly as to foreign affiliates and ANE transactions) have long been happening and views have changed over time. Even recently, it seems the CFTC has not been able to agree on the right approach. In early June, outgoing CFTC Chair J. Christopher Giancarlo indicated that he would call for a vote on a proposal regarding cross-border swaps dealing activities, including to address the treatment of FCSs and ANE transactions. (No such proposal has been issued.) Mr. Giancarlo also advocated, in a white paper, for the regulation of "transaction-level" aspects of ANE transactions (including clearing and execution requirements). Even Mr. Quintenz himself has been more open in the past to regulation of ANE transactions. In a speech responding to Mr. Giancarlo's white paper, Mr. Quintenz raised much more ambivalent tones about implementing rules for ANE transactions, whereas he now says flatly that "transaction-level requirements should not attach to ANE transactions."
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