CFTC issues final cross-border margin rule

Statement of Chairman Timothy Massad

I am pleased that today, the Commission has adopted a cross-border approach to our rule setting margin for uncleared swaps.

Our margin rule is one of the most important elements of swaps market regulation set forth in the Dodd-Frank Act. Margin requirements help ensure that uncleared swaps, which will always remain a sizable portion of the market, do not generate excessive uncollateralized risk. Last December, the Commission adopted a strong and sensible margin rule. It requires swap dealers and major swap participants to post and collect margin in their transactions with one another, and with financial entities with which they have significant exposures.

The risks our margin rule seeks to prevent do not only originate in the United States. The interconnected nature of the global swaps market means that risks created across the globe have the potential to flow back into the United States. We recognize that having a global swaps market is beneficial to all users. Therefore, one of the most important objectives we already accomplished was to ensure our margin rule is substantially similar to comparable international rules. Harmonization is critical to creating a sound international framework for regulation.

We also recognize that not all jurisdictions will adopt strong margin rules. And even where rules are substantially harmonized, there will still be some differences. Because cross-border transactions are commonplace, we must clarify which rules apply in different situations. Today, the Commission has acted to provide that clarification.

First, we have drawn a clear, reasonable line as to when the CFTC should take offshore risk into account. Today’s action ensures that our rule, or a comparable international measure, applies to swap dealers that are foreign consolidated subsidiaries of a U.S. parent. This helps address the risk that can flow back into the United States from that offshore activity, even when the subsidiary is not explicitly guaranteed by the U.S. parent. This treatment of foreign consolidated subsidiaries—and our general cross-border approach—is also consistent with the approach taken by the U.S. prudential regulators.

At the same time, to further our efforts toward harmonization, and to avoid conflicts with the rules of other jurisdictions, we have provided for a broad scope of substituted compliance. Not only will non-U.S. swap dealers be eligible for substituted compliance, so will U.S. swap dealers with respect to the margin they post to non-U.S. persons. This approach is an appropriate response to the complex world created by the swap industry, where global swap dealers can book a swap in a variety of ways. Dealers may book swaps through different subsidiaries, branches or affiliates all over the world, and they may do so based on a number of considerations, such as the most favorable legal treatment. Our approach is intended to protect our markets against risk coming from these cross-border transactions, while taking into account the interests of other regulators.

The process for conducting a comparability assessment of another jurisdiction’s rules is similar to what we have done in other areas. The rule specifies the various factors that should be considered, and indeed there is no reasonable way one can make a determination without evaluating those factors. One important consideration will be compliance with the international framework developed by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions. Our approach will look at the elements of each jurisdiction’s rule set with an eye towards a flexible, outcome-based determination. The process of making comparability assessments can take time.  In light of the impending September 1 compliance date, I have asked the CFTC staff to work closely with other domestic and international regulators, as well as industry participants, and endeavor to effect a smooth transition.

The approach we have finalized today helps ensure the safety and soundness of registered swap dealers, and reduces the potential for conflict with the rules of other international regulators. I thank all those who provided us with important feedback on these issues. I also thank CFTC staff for their work on this rule, and my fellow Commissioners for their careful consideration of this measure.

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