Earlier this year, when testifying to a US Congressional committee, I proposed a holistic solution to the lack of harmonization between Commodity Futures Trading Commission (CFTC) and Securities and Exchange Committee (SEC) rules. Since then, we’ve been putting flesh on the bones of that idea, and we published a paper last week on how it might work, co-signed by the US Chamber’s Center for Capital Markets Competitiveness (CCMC).
So, what’s it all about? Simply, the proposal sets out a straightforward and cost-effective way to avoid firms from having to comply with two sets of similar but not identical rules in the US – one for swaps from the CFTC and one for security based swaps from the SEC. Importantly, it allows the two commissions to retain enforcement authority for their respective markets.
Under this proposal, the two commissions would use their respective exemptive authorities to establish a safe harbor. This would allow firms to rely on their compliance with one commission’s rules to satisfy comparable requirements set by the other commission
This solves a very real problem. While the SEC has yet to implement many of its rules, there are a number of technical differences between its proposed requirements and those of the CFTC. The reporting rules are a case in point – there are currently variances in the time allowed to report trades to swap and security based swap data repositories. These differences might sound inconsequential and negligible for regulatory oversight, but they mean running two separate compliance systems for what are often economically similar instruments. This results in needless extra cost and complexity.
A safe harbor would remove duplication and inconsistencies, and would ensure US swaps markets function more efficiently, which is consistent with the commissions’ overall public policy goals. In fact, by adopting a safe harbor, the CFTC and SEC will address market fragmentation and the uncertainty over when the SEC will fully implement its security based swaps rules.
Exemptive relief would also be in line with the Dodd-Frank Act, which called on the CFTC and SEC to ensure regulatory comparability to the extent possible, and the intent of the current US Administration, which has expressed support for the commissions to harmonize their respective regulations.
In short, we think this is an elegant and necessary solution to a real problem for market participants – a solution that strikes an appropriate balance between achieving a consistent and comprehensive rule set over all segments of the US swaps market and ensuring the CFTC and SEC retain enforcement oversight for their markets without requiring a rule-by-rule harmonization effort. We look forward to engaging with US authorities on this idea, which will ensure the US swaps market is both safe and efficient.