CFTC Approves System Safeguards, Japanese Swaps Rules

The US Commodity Futures Trading Commission (CFTC) has approved two final rules for system safeguards testing requirements, as well as a comparability determination for Japan’s margin requirements for uncleared swaps.

By a unanimous vote, CFTC Commissioners approved final rules for system safeguards testing requirements for designated contract markets, swap execution facilities, swap data repositories, and derivatives clearing organisations. 

“Cybersecurity is a top concern for American companies, especially financial firms. These rules are a good step forward in addressing these concerns,” said Commissioner Sharon Bowen in a statement today.

Likewise, Commissioner Christopher Giancarlo issued a statement in which he commented: “Good regulation should be balanced. It should have a positive impact on the marketplace while mitigating costs to the extent possible. I believe today’s system safeguards final rule for derivatives clearing organisations (DCOs) generally achieves such balance although I have concerns about the cost impact on smaller DCOs.”

He agreed with Bowen that cyber and system security “is one of the most important issues facing markets today in terms of integrity and financial stability”, and that because of this, it is correct that the CFTC should make DCOs and certain other firms conduct regular testing of their systems.

Giancarlo said that his concerns regarding the impact of the rules on smaller DCOs are mainly related to the costs associated with the new rules, citing one commentator which claimed that the new requirements will increase costs for these firms by two or three times if they are implemented as currently proposed.

However, the two Commissioners were divided on the comparability determination for Japan’s margin requirements for uncleared swaps, with Bowen refusing to support it.

 “I will be voting no as I think it would introduce greater risk into the derivatives markets – the very thing that we were sent here by the American people to prevent,” she said in a separate statement.

Bowen argued that, although Japanese law has some strong similarities to US ones, “there are some areas of divergence that are significant and would allow American companies to do overseas what they would never be allowed to do here”.

She continued: “And make no mistake; though these companies are physically located in Japan, their cash line runs right back to the United States. That risk could be borne again by American households. A comparability determination should not be the back door way of undoing or weakening our regulations and thereby incentivising our companies to send their risky business to their affiliates located in Japan.

The main issue preventing Bowen from supporting the comparability determination is the different bankruptcy laws in Japan compared to the US. In her statement, she suggests as a solution to this issue, proposing that the CFTC provides Japan with a partial comparability determination. This would entail American businesses following the Japanese margin rule, but adhering to the US bankruptcy requirements.

Despite Bowen’s objections, the comparability determination was approved, as both Commissioners Giancarlo and chairman Timothy Massad voted in favour of it. This means that substituted compliance will be permitted with certain of Japan’s margin requirements for uncleared swaps as compared to the uncleared swap margin provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Commission regulations.

Yet despite his support for this ruling, Giancarlo was still critical of the CFTC’s approach in reaching this agreement, calling it “overly complex and unduly narrow”.

He also expressed concern that the proposed “element-by-element” methodology for determining when substituted compliance with a foreign regulator’s margin regime could result in an impracticable patchwork of US and foreign regulations for cross-border transactions.

Giancarlo then added: “My concerns were realised last week when Asian swaps markets ground to a halt amidst confusion about the application of new margin rules to major market participants. Once again, there were reports of counterparties avoiding trading with US persons. 

“I believe this rule’s subjectivity and complexity will continue to be a source of regulatory uncertainty at the expense of US financial firms, their employees and the American businesses they serve.

“I nevertheless support the comparability determination for Japan. In this instance, the Commission has appropriately recognised that certain differences between the US margin regime and Japan’s margin regime achieve comparable outcomes. Wrong approach; right outcome. I therefore vote in favour of the determination.”



Galen Stops

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