The European Central Bank (“ECB”) has sent a letter to the CFTC warning that it may halt its over-the-counter trade with U.S. counterparties if the Commission does not exempt it from certain clearing, execution, reporting, and margin requirements in the Dodd-Frank Act.
In its letter, the ECB argues that foreign central banks must be exempted from Dodd-Frank because of legal uncertainties that the Act creates. Furthermore, the Bank claims that it is protected by the immunities and exemptions provided by the International Organizations Immunities Act (“IOIA”), invoking this piece of legislation no fewer than seven times. Should immunity not be forthcoming, the ECB says it is prepared to alter who it does business with: “If regulatory requirements are imposed on foreign central banks, the ECB and other central banks might shift swaps activity away from the US markets or US counterparties. This would reduce the liquidity of the US markets, constrain the competitiveness of US counterparties and reduce the effectiveness of central bank actions.”
This letter does not come as a surprise. For months, U.S. swaps dealers have warned that strict rules would frustrate and discourage foreign trading partners. This is the second letter that the ECB has sent to the CFTC objecting to the international scope of the agency’s Dodd-Frank proposals.
The ECB is specifically requesting:
- Full exemption from American OTC derivatives regulations involving any contract, agreement, or transaction to which the ECB or other Euro-zone central bank is a counterparty;
- Explicit exemption from specific provisions, including written confirmation it will not be categorized as a “swap dealer” or “major swap participant”;
- Confirmation that it will have immunity from data-reporting requirements, as it is entitled to under the IOIA;
- Categorization as a non-financial entity in order to avoid margin requirements on non-cleared swaps.
These requests are not without precedent. The Federal Reserve, the United States’ own central bank, already enjoys a blanket exemption from OTC derivatives regulation. The ECB claims that failure to extend this exemption to foreign central banks violates Dodd-Frank section 752, an order to achieve “consistent international standards.” The World Bank’s International Bank for Reconstruction and Development (“IBRD”) and the International Finance Corporation (“IFC”) have also sent similar letters.