CFTC Softens Stance on Substituted Compliance

The CFTC on Friday unanimously approved proposed interpretive guidance regarding cross-border enforcement of swap trading rules it has promulgated under the Dodd-Frank Act.

The proposed guidance  signals CFTC Chairman Gensler’s willingness to accept substituted compliance by foreign companies and overseas branches of U.S. companies, after the stricter approach he had favored faced intense criticism from industry groups, foreign regulators and  fellow commissioners.

Non-U.S. swap dealers (SDs) and major swap participants (MSPs) will be permitted to comply with their home jurisdictions’ entity-level regulations governing capital and risk management requirements in place of CFTC rules, as long as the two are comparably rigorous.

For transaction-level clearing and margin rules, substituted compliance will be accepted for transactions with a non-U.S. person guaranteed by a U.S. person or a non-U.S. affiliate conduit of a U.S. person. Foreign branches of U.S. firms will be allowed to apply substituted compliance in these areas as well.

Dodd-Frank clearing, trade execution and real-time reporting requirements will still be enforced for any swap where the counterparty is a U.S. person.

In another long-awaited decision, the proposed guidance defines U.S. person as including a U.S. person’s foreign branches and agencies, but not its foreign affiliates and subsidiaries.

A watered-down version of the proposed guidance has been expected since June 21st, when the CFTC canceled a vote on the issue after sources say Chairman Gensler realized that he did not have enough votes for a version that allowed for much less substituted compliance.

In its current form, the proposed guidance closely follows the CFTC’s traditional approach, which has been to rely on substituted compliance whenever a foreign regulator’s requirements make it possible.

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Photo credit: Brett Jordan

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