After months of “long and sometimes difficult” negotiations, the U.S. Commodity Futures Trading Commission and the European Commission on July 11 announced a framework for cross-border regulation of swaps market.
It was the latest step in a grueling effort to oversee the $600 trillion market—an effort that’s included input from a small army of industry lawyers who have met with U.S. regulators dozens of times.
Leading the pack was Cleary Gottlieb Steen & Hamilton partner Edward Rosen and associate Colin Lloyd, who met with commission officials 10 times this year to discuss cross-border issues on behalf of Citigroup Inc. and the Institute of International Bankers, according to CFTC records.
Lawyers from Davis, Polk and Wardwell and Gibson Dunn & Crutcher have also been active, as well as numerous in-house counsel from the world’s biggest financial services companies such as UBS A.G., Barclays Bank PLC, Credit Suisse Group A.G., Bank of America Corp. and JP Morgan Chase & Co.
In announcing the “Path Forward” for swaps regulation, the CFTC and E.C. touted their “commitment to lower risk and promote transparency in the over-the-counter derivatives markets, which were at the heart of the financial crisis.”
Because the derivatives market is international, regulatory consistency is key. “Without coordination, subjecting the global market to the simultaneous application of each other’s requirements could lead to conflicts of law, inconsistencies and legal uncertainty,” the commissions said in a joint press release.
The regulators outlined their approaches to transparency, risk mitigation for uncleared trades, offshore guaranteed affiliates, mandatory clearing and reporting of trades.
The announcement set the stage for a milestone July 12 vote by the CFTC’s five commissioners on broader guidance dealing with cross-border swaps.
It’s proven a highly contentious issue, with different views even within the Democratic Party.
On July 3, eight Democratic senators urged CFTC chairman Gary Gensler and U.S. Securities and Exchange Commission head Mary Jo White to get tough, warning in a letter that American firms could “skirt the entire U.S.-based swaps regulatory regime (including any U.S. requirements for substituted compliance) simply by engaging in ‘non-guaranteed’ trading through foreign subsidiaries.”
The letter, which was signed by senators Jeff Merkley (D – N.M.), Carl Levin (D-Mich.), Tom Harkin (D-Iowa), Elizabeth Warren (D-Mass.), Jeanne Shaheen (D-N.H.), Barbara Boxer (D-Calif.), Richard Blumenthal (D-Conn.), and Dianne Feinstein (D-Calif.), urged the agencies to move forward with their separate rules as quickly as possible, writing, “Do not further delay implementing the law any longer—the risk to our economy is simply too great.”
Other Democrats, however, appeared more sympathetic to industry concerns. On June 26, six Democratic senators—including both members from New York, Charles Schumer and Kirsten Gillibrand, sent a letter to Treasury Secretary Jacob Lew arguing that cross-border rules should be delayed because “more time is needed for domestic harmonization and sequencing with regulations that occur abroad.”
CFTC records make it clear that affected companies have not been sitting on the sidelines.
According to agency data, Cleary’s Rosen and Lloyd have met with Gensler seven times this year to discuss cross-border issues.
“The CFTC has indicated a willingness to be responsive to a number of the concerns that have been raised by stakeholders,” Rosen, a specialist in structuring complex securities and derivatives transactions, said in an email message. “That said, and despite the lengthy period over which cross border issues have been under consideration at the CFTC, action on these issues has tended to be concentrated over relatively short bursts.”
He continued, “This approach has compromised the efficacy of some of the commission's efforts to be responsive. In other respects there is a fundamental disagreement between the commission and the industry on the appropriate scope of the CFTC's extraterritorial jurisdiction under Dodd-Frank.”
Davis Polk partner Annette Nazareth, a former SEC commissioner, made two visits to the CFTC in June to talk about cross-border issues. She was accompanied by leaders of the Securities Industry and Financial Markets Association as well as executives from The Goldman Sachs Group Inc., Morgan Stanley, Barclays, HSBC Holdings PLC, Nomura Securities, Credit Suisse and Northern Trust Corp.
Gibson Dunn’s Michael Bopp, who chairs the firm’s public policy group, and counsel Jeffrey Steiner, a former special counsel in the CFTC’s division of market oversight, had two CFTC meetings with the Coalition of Derivatives End-users. Group members include Ford Motor Co., Honeywell International Inc., General Electric Co., United Technologies Corp., IBM Corp., Honda Motor Co., John Deere & Co. and BP plc.
Contact Jenna Greene at firstname.lastname@example.org.