Transparent, open, and competitive derivatives trading is a key element of the derivatives reforms included in the Dodd-Frank Act. To implement this reform, Congress mandated that most derivatives be traded on exchanges known as Swaps Execution Facilities (SEFs), which must provide open access and competitive pricing.
Today, pursuant to the Path Forward agreement with the European Union, the Commodity Futures Trading Commission (CFTC) issued a no-action letter permitting U.S. derivatives trading on European trading platforms that are not registered with the U.S. as SEFs. Permitting trading on such European platforms raises serious concerns about creating a back door exit from U.S. regulation that could be used to evade the statutory mandate for competitive and open derivatives trading. AFR would instead favor limiting regulated derivatives trading to entities that have registered as swaps execution facilities and are fully compliant with U.S. regulation.
However, the CFTC exemption does include important positive elements. The exemption requires that European trading platforms follow the most important rules binding U.S. SEFs in order to quality for relief. These requirements are specific, not just statements of broad principle, and have to be enforced through rules of the home country regulator, not through informal agreements with the exchange. The CFTC is requiring that these rules be established within 30 days. Furthermore, the CFTC has reserved the right to remove the exemptive relief at any time and require a European exchange to register as a U.S SEF if significant business involving U.S. persons migrates to the exchange, or if specified requirements are not followed. If properly enforced, these should be important protections against regulatory arbitrage.
The derivatives market is a global market, but risks incurred by U.S. firms can impact the U.S. economy regardless of where a derivatives transaction takes place. As the process of cross-border regulation moves forward we urge the CFTC to ensure that all derivatives transactions posing a risk to the U.S. economy fall either under U.S. rules or under a regime that is fully equivalent to U.S. rules and is properly enforced. This requires both careful specification of the standards for equivalence and continued monitoring of the enforcement of these standards.