Cross-Border Activities Regulation - Substituted Compliance

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Dodd-Frank Timeline, Cross-Border Application of Swaps Provisions, CFTC
Proposal Date Comment Deadline Compliance Extension Guidance Effective Date
July 12, 2012 August 27, 2012 July 12, 2013 July 26, 2013
Dodd-Frank Timeline, Cross-Border Application of Swap Entity Provisions, SEC
Final Rule Posted Effective Date Final Rule - Non-U.S. Persons
July 9, 2014 September 8, 2014 February 10, 2016

Substituted compliance, as defined by the Commodity Futures Trading Commission, is where the commission would permit non-U.S. swap participants swaps whose activities might bring them within the scope of certain U.S. regulations to use compliance with regulations in their home jurisdiction as a substitute for compliance with the relevant Commission regulations.<ref>CFTC Approves Comparability Determinations for Six Jurisdictions for Substituted Compliance Purposes. CFTC. Retrieved on December 23, 2013.</ref>


Among the provisions of Title VII of the Dodd-Frank Act is a requirement that swaps reforms shall not apply to activities outside the United States unless those activities have “a direct and significant connection with activities in, or effect on, commerce of the United States.” The CFTC is tasked with developing a framework for oversight of the swaps market, and to adapt the Commodity Exchange Act to include swaps oversight. The SEC is tasked with developing a framework for oversight of security-based swaps, and to adapt the SEC regulations to include such oversight.

The concern is that swap trading by foreign affiliates of large financial entities pose a systemic risk to the U.S., and thus should be under CFTC jurisdiction. This guidance is meant to be the starting point for discussion with market participants regarding the structure of cross-border jurisdiction.

On December 20, 2013, the CFTC issued a determination on substituted compliance on business conduct standards for Australia, Canada, the European Union (“EU”), Hong Kong, Japan, and Switzerland.<ref>U.S. permits some foreign swaps rules, EU still unhappy. Reuters. Retrieved on December 23, 2013.</ref> Substituted compliance was not granted for certain rules on swap data reporting, swap clearing and trading on non-exchange execution venues. The commission has deferred its determination on capital requirements until U.S. rules are in place.<ref>CFTC Extends Some Swaps Rules to Overseas Firms. Retrieved on December 23, 2013.</ref>

Earlier that month, SIFMA, ISDA and the Institute of International Bankers (IIB) filed a legal challenge to the CFTC’s Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations (“Cross-Border Rule”), and to the cross-border aspects of related rules. Click here to view summary of the suit.

Summary of the December 2013 Determination[edit]

The determination covers certain "entity level" requirements as defined by the CFTC Final Guidance: Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, July 2013. However, the commission deferred its determination on capital adequacy and swap data reporting.

The commission also granted substituted compliance with certain "transaction level" requirements for the European Union and Japan.

The rule was passed in seriatim by a vote of 3-1 with Commissioner Scott O'Malia voting against.

Related Document: Compliance Determination Table[edit]


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