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DODD-FRANK DERIVATIVES REFORM: 

CHALLENGES FACING U.S. AND 

INTERNATIONAL MARKETS

HEARING

BEFORE THE

SUBCOMMITTEE ON 

GENERAL FARM COMMODITIES 

AND RISK MANAGEMENT

OF THE

COMMITTEE ON AGRICULTURE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

DECEMBER 13, 2012

Serial No. 112–35

(

Printed for the use of the Committee on Agriculture 

agriculture.house.gov 

COMMITTEE ON AGRICULTURE 

FRANK D. LUCAS, Oklahoma, Chairman 

BOB GOODLATTE, Virginia, 

Vice Chairman 

TIMOTHY V. JOHNSON, Illinois 

STEVE KING, Iowa 

RANDY NEUGEBAUER, Texas 

K. MICHAEL CONAWAY, Texas 

JEFF FORTENBERRY, Nebraska 

JEAN SCHMIDT, Ohio 

GLENN THOMPSON, Pennsylvania 

THOMAS J. ROONEY, Florida 

MARLIN A. STUTZMAN, Indiana 

BOB GIBBS, Ohio 

AUSTIN SCOTT, Georgia 

SCOTT R. TIPTON, Colorado 

STEVE SOUTHERLAND II, Florida 

ERIC A. ‘‘RICK’’ CRAWFORD, Arkansas 

MARTHA ROBY, Alabama 

TIM HUELSKAMP, Kansas 

SCOTT DESJARLAIS, Tennessee 

RENEE L. ELLMERS, North Carolina 

CHRISTOPHER P. GIBSON, New York 

RANDY HULTGREN, Illinois 

VICKY HARTZLER, Missouri 

ROBERT T. SCHILLING, Illinois 

REID J. RIBBLE, Wisconsin 

KRISTI L. NOEM, South Dakota 

COLLIN C. PETERSON, Minnesota, Ranking 

Minority Member 

TIM HOLDEN, Pennsylvania 

MIKE MCINTYRE, North Carolina 

LEONARD L. BOSWELL, Iowa 

JOE BACA, California 

DAVID SCOTT, Georgia 

HENRY CUELLAR, Texas 

JIM COSTA, California 

TIMOTHY J. WALZ, Minnesota 

KURT SCHRADER, Oregon 

LARRY KISSELL, North Carolina 

WILLIAM L. OWENS, New York 

CHELLIE PINGREE, Maine 

JOE COURTNEY, Connecticut 

PETER WELCH, Vermont 

MARCIA L. FUDGE, Ohio 

GREGORIO KILILI CAMACHO SABLAN, 

Northern Mariana Islands 

TERRI A. SEWELL, Alabama 

JAMES P. MCGOVERN, Massachusetts 

JOHN GARAMENDI, California 

PROFESSIONAL STAFF

NICOLE SCOTT, Staff Director 

KEVIN J. KRAMP, Chief Counsel 

TAMARA HINTON, Communications Director 

ROBERT L. LAREW, Minority Staff Director 

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT

K. MICHAEL CONAWAY, Texas, Chairman 

STEVE KING, Iowa 

RANDY NEUGEBAUER, Texas 

JEAN SCHMIDT, Ohio 

BOB GIBBS, Ohio 

AUSTIN SCOTT, Georgia 

ERIC A. ‘‘RICK’’ CRAWFORD, Arkansas 

MARTHA ROBY, Alabama 

TIM HUELSKAMP, Kansas 

RENEE L. ELLMERS, North Carolina 

CHRISTOPHER P. GIBSON, New York 

RANDY HULTGREN, Illinois 

VICKY HARTZLER, Missouri 

ROBERT T. SCHILLING, Illinois 

LEONARD L. BOSWELL, Iowa, Ranking 

Minority Member 

MIKE MCINTYRE, North Carolina 

TIMOTHY J. WALZ, Minnesota 

LARRY KISSELL, North Carolina 

JAMES P. MCGOVERN, Massachusetts 

DAVID SCOTT, Georgia 

JOE COURTNEY, Connecticut 

PETER WELCH, Vermont 

TERRI A. SEWELL, Alabama 

——

MATT SCHERTZ, Subcommittee Staff Director

(II) 

(III)

C O N T E N T S 

Page 

Boswell, Hon. Leonard L., a Representative in Congress from Iowa, opening 

statement .............................................................................................................. 4

Conaway, Hon. K. Michael, a Representative in Congress from Texas, opening 

statement .............................................................................................................. 1

Prepared statement .......................................................................................... 2

Submitted correspondence ............................................................................... 50

Crawford, Hon. Eric A. ‘‘Rick’’, a Representative in Congress from Arkansas, 

submitted statements: 

Boleat, Mark, Chairman, Policy and Resources Committee, City of 

London .................................................................................................... 48

Maijoor, Steven, Chair, European Securities and Markets Authority .. 47

Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, opening 

statement .............................................................................................................. 24

Neugebauer, Hon. Randy, a Representative in Congress from Texas, submitted letter .......................................................................................................... 74

Scott, Hon. David, a Representative in Congress from Georgia, opening statement ...................................................................................................................... 4

Submitted statement on behalf of Americans for Financial Reform ............ 76

WITNESSES

Chilton, Hon. Bart, Commissioner, Commodity Futures Trading Commission, 

Washington, D.C. ................................................................................................. 6

Prepared statement .......................................................................................... 7

Sommers, Hon. Jill E., Commissioner, Commodity Futures Trading Commission, Washington, D.C. ........................................................................................ 9

Prepared statement .......................................................................................... 10

Kono, Masamichi, Vice Commissioner for International Affairs, Financial 

Services Agency of Japan; Chairman of the Board, International Organization of Securities Commissions, Tokyo, Japan .................................................. 12

Prepared statement .......................................................................................... 14

Pearson, Patrick, Head, Financial Market Infrastructures Unit, Internal Market and Services Directorate General, European Commission, Brussels, Belgium ...................................................................................................................... 18

Prepared statement .......................................................................................... 20

(1)

DODD-FRANK DERIVATIVES REFORM: 

CHALLENGES FACING U.S. AND 

INTERNATIONAL MARKETS 

THURSDAY, DECEMBER 13, 2012

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND

RISK MANAGEMENT, 

COMMITTEE ON AGRICULTURE, 

Washington, D.C. 

The Subcommittee met, pursuant to call, at 8:59 a.m., in Room 

1300 of the Longworth House Office Building, Hon. K. Michael 

Conaway [Chairman of the Subcommittee] presiding. 

Members present: Representatives Conaway, King, Neugebauer, 

Austin Scott of Georgia, Crawford, Huelskamp, Ellmers, Gibson, 

Hultgren, Hartzler, Lucas (ex officio), Boswell, Walz, McGovern, 

David Scott of Georgia, Courtney, Welch, Sewell, and Garamendi. 

Staff present: Tamara Hinton, Kevin Kramp, Josh Mathis, John 

Porter, Matt Schertz, Nicole Scott, Suzanne Watson, Jason 

Goggins, Liz Friedlander, C. Clarke Ogilvie, John Konya, Debbie 

Smith, and Caleb Crosswhite. 

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A 

REPRESENTATIVE IN CONGRESS FROM TEXAS 

The CHAIRMAN. All right. This hearing of the Subcommittee on 

General Farm Commodities and Risk Management to review DoddFrank derivatives reform and the challenges facing U.S. and international markets will come to order. A bit of a brief explanation, 

we have votes around 11 o’clock, and with the gracious consent of 

our four presenters today, we have combined the two panels into 

one in an attempt to make sure that we respect the fact that the 

U.S. regulators are here as well as our foreign regulators who have 

come a long way to visit with us. And to only get through one panel 

and then leave to go vote and that covey of quail disbursement 

looking thing that happens when we finish votes is disrespectful, 

so we have combined them into one. And we ask unanimous consent that Mr. Garamendi, who is not yet on the Committee, will 

be joining us today if everybody is okay with that. All right. 

The Subcommittee is honored to have Commissioner Jill 

Sommers and Commissioner Bart Chilton from the United States 

Commodity Futures Trading Commission to join us today. In addition, we have Mr. Masamichi Kono from the Financial Services 

Agency of Japan and Mr. Patrick Pearson from the European Commission. And I believe this is the first time the United States ConVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 I:\DOCS\112-35\77833.TXT BRIAN
2

gress has welcomed international regulators to testify with respect 

to the Dodd-Frank Act. And I want to thank them for traveling to 

Washington, D.C., to appear before us today and we are looking 

forward to their testimony. 

Today’s meeting of the General Farm Commodities and Risk 

Management Subcommittee continues a series of hearings that 

started in 2011 aimed at examining problems that have arisen as 

regulators continue to work through the Dodd-Frank rulemaking 

process. This summer, the CFTC issued its proposed cross-border 

guidance to the marketplace for review and comment. What followed was an almost universal outcry of foreign governments and 

international regulators. Regulators who oversee the vast majority 

of derivatives markets outside the United States expressed deep 

concerns that the CFTC’s proposed application of Dodd-Frank outside of the U.S. borders. 

Respect for equivalent, but not identical, regulatory standards 

has been a cornerstone of international banking regulations for 

decades. But now, the CFTC, pushed by Mr. Gensler, appears 

poised to rewrite that standard of international cooperation and extend the reach of U.S. law to regulate activity in foreign jurisdictions over the objections of the sophisticated and accountable regulators. 

I understand the international regulators have met with the 

Chairman and his staff several times in recent months to discuss 

how to resolve these cross-border concerns. However, based on his 

testimony yesterday to the Financial Services Committee, it does 

not appear that the Chairman is ready to accept that foreign efforts and regulatory reform will be equivalent to the rule proposed 

by the CFTC. Without a willingness to trust international regulators and their ability to regulate their own markets, I fear that 

next month’s talks in Brussels will be just that—more talk. 

A major concern voiced by international regulators is that the 

global derivatives markets may become regionalized as institutions 

and customers transact a majority of business within their home 

jurisdictions. Such an outcome would concentrate risk in various 

economies and sectors of the world. Here at home, American endusers who use swaps to manage everyday business risk may have 

fewer counterparties to deal with. Fewer counterparties will of 

course mean less competition and less liquidity in the market and, 

I believe, will lead to higher costs for those end-users and a higher 

concentration of risks in the United States. With our economy facing an uncertain future, we can ill afford to implement reforms 

without a good faith attempt to cooperate with the international 

community so we do not negatively impact global markets. 

Getting the Dodd-Frank regulatory scheme right is more important than getting it done quickly. Congress can never become complacent. Our work did not end when this law was signed by the 

President in 2010. Examining the rulemaking process for errors, 

unfair instructions, or unintended consequences and then fixing the 

mistakes is the essential part of our job. 

I want to thank all the Members of the Subcommittee on both 

sides of the aisle for their continued commitment to good oversight. 

It is important that Dodd-Frank, irrespective of our ideological difVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 I:\DOCS\112-35\77833.TXT BRIAN
3

ferences, is implemented in a way that is logical and fair and beneficial for the participants who depend on the financial markets. 

[The prepared statement of Mr. Conaway follows:]

PREPARED STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE IN

CONGRESS FROM TEXAS

Good morning, thank you all for joining us for this important hearing to examine 

challenges facing U.S. and international markets as we continue implementing the 

Dodd-Frank Act. 

The Subcommittee is honored to have Commissioner Jill Sommers and Commissioner Bart Chilton from the U.S. Commodity Futures Trading Commission join us 

today. 

In addition, I would like to extend a warm welcome to Mr. Masamichi Kono from 

the Financial Services Agency of Japan and Mr. Patrick Pearson from the European 

Commission. 

I believe this is the first time the U.S. Congress has welcomed international regulators to testify with respect to the Dodd-Frank Act, and I thank them for traveling 

to Washington to appear before us—we look forward to their testimony. 

Today’s meeting of the General Farm Commodities and Risk Management Subcommittee continues a series of hearings that started in 2011 aimed at examining 

problems that have arisen as regulators continue to work through the Dodd-Frank 

rulemaking process. 

This summer the CFTC issued its proposed cross-border guidance to the marketplace for review and comment. What followed was the almost universal outcry of 

foreign governments and international regulators. 

Regulators who oversee the vast majority of derivatives markets outside of the 

United States expressed deep concerns at the CFTC’s proposed application of the 

Dodd-Frank Act outside of the U.S. borders. 

Respect for equivalent, but not identical, regulatory standards has been a cornerstone of international banking regulation for decades. But now the CFTC, pushed 

by Chairman Gensler, appears poised to rewrite the standards of international cooperation and extend the reach of U.S. law to regulate activity in foreign jurisdictions over the objections of the sophisticated and accountable regulators. 

I understand that international regulators have met with the Chairman and his 

staff several times in recent months to discuss how to resolve these cross-border 

concerns. However, based on his testimony yesterday in the Financial Services Committee, it does not appear that Chairman Gensler is ready to accept that foreign 

efforts at regulatory reform will be equivalent to the rules proposed by the CFTC. 

Without a willingness to trust international regulators and their ability to regulate their own markets, I fear that next month’s talks in Brussels will be just that, 

more talk. 

A major concern voiced by international regulators is that the global derivatives 

market may become regionalized as institutions and customers transact a majority 

of business within their home jurisdictions. Such an outcome would concentrate risk 

in various economies and sectors of the world. 

Here at home, American end-users who use swaps to manage everyday business 

risks may have fewer counterparties to deal with. Fewer counterparties will mean 

less competition and less liquidity in the market, which will lead to higher costs for 

end-users and a higher concentration of risk in the United States. 

With our economy facing an uncertain future, we can ill-afford to implement reforms without a good faith attempt to cooperate with the international community 

so we do not negatively impact global markets. 

As I have said, getting Dodd-Frank right is more important than getting it done 

quickly. Congress can never become complacent; our work did not end when this law 

was signed by the President in 2010. Examining the rulemaking process for errors, 

unclear instructions, or unintended consequences, and then fixing the mistakes is 

an essential part of our job. 

I want to thank all the Members of this Subcommittee, on both sides of the aisle, 

for their continued commitment to good oversight. It is important that Dodd-Frank, 

irrespective of our ideological differences, is implemented in a way that is logical, 

fair, and beneficial for the participants who depend on the financial markets. 

With that, I will turn to our Ranking Member, Mr. Boswell, for his opening remarks and then to our witnesses.

4

The CHAIRMAN. With that, I will turn to our Ranking Member, 

Mr. Scott, for his opening remarks and then we will move on to our 

witnesses. Mr. Scott? 

OPENING STATEMENT OF HON. DAVID SCOTT, A 

REPRESENTATIVE IN CONGRESS FROM GEORGIA 

Mr. DAVID SCOTT of Georgia. Thank you very much, Chairman 

Conaway. Chairman, I had to do sort of a double-check on the calendar on the way over here this morning to make sure that it was 

really December 2012 and not December 2010 because I sort of had 

a serious case of de ́ja` vu while walking over. It seems like we have 

had countless hearings over the last few years on the issues before 

us today, so many that they are starting to sort of blur together 

in my mind. And yet, after fielding more complaints about a lack 

of timing and coordination on behalf of the CFTC and their implementation of Dodd-Frank regulations on derivatives transactions, 

here we are once again trying to get answers to the questions that 

we have been asking ever since the beginning. 

Now, make no mistake about it, the complaints I—and I am sure 

others—have heard are not just market participants crying wolf. 

The consequences of poor sequencing of rules and implementation 

dates, poor coordination both with other domestic regulators and 

foreign regulators as well, are real and they are very damaging to 

U.S. companies. As we saw earlier this year, domestic banks can 

and they will lose business to foreign competitors if Title VII rules 

are not implemented properly and in a timely fashion. And that 

will in turn harm the end-user companies that they serve and that 

we on this Committee care so very much about. 

So again, Chairman Conaway, I want to thank you for holding 

the hearing. I hope we can make some progress on getting to the 

bottom of an issue that has frustrated us for some time now and, 

at the very least, remind the CFTC that they need to do better in 

implementing Title VII of Dodd-Frank. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Mr. Scott. 

Before we turn to our witnesses, I would like to, with unanimous 

consent, yield a couple of moments to Mr. Boswell, my Ranking 

Member, who I have worked with for years now and is a good 

friend. So, Mr. Boswell? 

OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A 

REPRESENTATIVE IN CONGRESS FROM IOWA 

Mr. BOSWELL. Well, thank you very much, Mr. Chairman. And 

I just want to make some, if I could, farewell remarks. 

You know, I have no animosity about anything that has happened. This place works as it works and we all know that. And it 

has been a privilege to work with you, Mr. Chairman, and your 

predecessor, and back when I was chair and all those things. But 

we have a tremendous responsibility, so as the patriarch of this 

Committee, I guess, age has something to do with it. And Mr. King, 

you don’t have to smile that much. Yes, I am much older than you. 

But anyway, as I look out here at Mr. Chilton and some of the 

rest of you who I have learned a lot about and you have taught us 

a lot, and it is a tremendous responsibility here. And I think back 

5

to the debacle that took place and what certainly contributed to 

this recession and all the things we are struggling with now and 

it seems like it is really hard to get to and think about what CFTC 

has done and so on. The CFTC, as you well know, Mr. Chairman, 

didn’t cause the problem. They have done their job. And we know 

that and it is just a point. And as we have learned recently on 

other issues—and I am rambling here little bit so if it is okay, then 

I will stop and I will be full stop. 

The CHAIRMAN. All right. 

Mr. BOSWELL. Thank you. 

You know, if we don’t give the tools to do the job, for example, 

to the IRS and if this fiscal cliff thing happens, they don’t have the 

capacity to deal with their responsibility. Well, I see the same 

thing with you folks that have the CFTC responsibility, whether 

we like Dodd-Frank or we don’t like it, we have done it. If we have 

the will or the desire to change it, well, maybe that will happen, 

but meanwhile, we have charged the CFTC with a lot of responsibility, which we should. But they got to have the tools. 

And I know when I came back, Steve, from all those years gone 

in the army and I had to learn how to take care of machinery 

again, I didn’t have the right toolboxes. And here I am stuck with 

a massive 750 out there and a bearing going out and I don’t have 

the things in my toolbox to deal with it. But when I did, I could. 

And maybe that is an oversimplification, but we have to give them 

the tools. We have said this is your responsibility. 

You know, Mr. Chairman, you and I have talked about this and 

we have not exactly agreed on everything, but that is part of the 

process, which we both respect very much and it is what makes our 

country great. You got to have the wherewithal to do what we have 

asked you to do. I think you have done pretty darn good considering the things you have accomplished. So my caution, I guess, or 

my counsel or whatever you want to call this as I depart this responsibility is, a lot weighs on the welfare of the country to do this 

right, to have daylight is a term I learned to use, to have daylight 

on stuff so they know what is going on. And if we know what is 

going on, we got the possibility of doing what we need to do, which 

might include leave it alone and or do something that needs to be 

done to keep our country on its path. 

So I would just leave this thought with you. If we are going to 

change it, well, then, change it. If we can’t, let us at least give the 

Commission the tools they need, the hardware, and the people to 

do the job we have said you have to do and not just be critical of 

it when they can’t get it done because they don’t have the tools. 

And with that, I just want to say to David, thank you for responding when this hearing was coming up. You know, I am going 

out the door and I know that and I did want to come and participate, but I thought it better for the continuity and going on if you 

or somebody would step up, and you have, and I thank you for it. 

And Mr. Conaway, I just appreciate you and your sincerity about 

what you do and expertise that you bring with your vast experience 

in accounting and so on. And since I did a little thing called roughnecking down in your part of the country when I was a youngster, 

I have a lot of respect for West Texas. You know, I was on a standard rig—I probably told you one time—when the oil came in. Wow. 

6

What an experience. But anyway, so much for that. That is too 

much reminiscing but I wish you well. 

The CHAIRMAN. Thank you. 

Mr. BOSWELL. I thank you for the opportunity to have a moment, 

and I will try not to interfere anymore, but if I have to, I will. 

But thank you. 

The CHAIRMAN. Thank you. Mr. Boswell yields back. 

Mr. Chilton, 5 minutes. 

STATEMENT OF HON. BART CHILTON, COMMISSIONER,

COMMODITY FUTURES TRADING COMMISSION,

WASHINGTON, D.C. 

Mr. CHILTON. Thank you, Mr. Chairman. It is a pleasure to be 

with you. Thank you, Members of the Subcommittee, and particularly thank you, Chairman Boswell, for all your service. It has been 

an honor and personal privilege to work with you, sir. 

And I am also pleased to testify with my fellow regulator, Commissioner Sommers. We did so last year. And as you know, she 

heads our Global Markets Advisory Committee and does a superb 

job. And I thank her for all her counsel and assistance over the 

years. 

And as Chairman Boswell was talking, it reminded me of that 

movie around this time of year, It’s a Wonderful Life. Do you remember that circumstance where Uncle Billy loses the money and 

George says to him, ‘‘Where is that money you stupid, silly, old 

fool? Where is that money? Do you realize what this means? It 

means bankruptcy and scandal and prison. That is what it means. 

One of us is going to jail and it is not going to be me.’’ 

And the reason I raise that is that back in 2008—and I get this 

question asked all the time and perhaps you do back in your districts—how come nobody went to jail for what happened in 2008 for 

tanking the economy? Well, part of the reason is there wasn’t a law 

against what they did, what was done to the economy. That is why 

Dodd-Frank is important. I think it is a good law. 

But as many Members, including Chairman Conaway has pointed out, if we don’t implement it correctly, it could be bad. We have 

to do this right. We have to have a balanced approach. And that 

is particularly important with regard to cross-border issues, because as you all know and have spoken to us about in no uncertain 

terms, these markets are correlated. They are impacted globally. So 

we have to make sure that what we do doesn’t put our U.S. firms 

at a competitive disadvantage, but we do want, ultimately, harmonized global regulations to the extent that it is practical. 

So with regard to that, if you go back to when Dodd-Frank was 

passed in 2010, at that point, it looked like other nations, and particularly the European Union, were maybe 2 years behind implementing their financial reforms—2 years. So there is a big concern 

about regulatory arbitrage. What if the U.S. went first and did the 

things by the dates we required, July of 2011? But it turns out 

since we have taken our time—as Chairman Conaway has written 

to us many times, take your time, go slow, get it right—we have 

listened to you. You have been correct, sir. So we have slowed 

down. We have about 2⁄3 our regs done so far but we are still trudging along. But in that delay, now there is not that big 2 year difVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 I:\DOCS\112-35\77833.TXT BRIAN
7

ference anymore. Now there is only maybe 5, 6 months difference 

between us and the EU. Some of the other nations are little bit behind that. 

So the thought that seems to make sense to me—and I am 

pleased that Commissioner Sommers and I are of a fairly like mind 

on this—is that let us sort of jump into the pool at the same time. 

Let us perhaps delay compliance for 6 months with some of these 

things in order that we can all do this at the same time. There is 

no regulatory arbitrage, and we don’t negatively impact our companies, our U.S. financial firms. So I am not suggesting that that 

delay, Mr. Chairman, will make it like a super great wonderful life 

for financial firms, but it will definitely improve things. 

And one final note, I have given to the clerk some sheets that 

I have unrelated to this issue of cross-border, I know you guys are 

dealing with the farm bill, but we do have a reauthorization coming up next year and there are some issues that are critical. I have 

just provided one page for you. If you can take them and maybe 

we can talk about them next year, but they have to do with a need 

for an insurance fund in the derivatives sector because now derivatives customers are treated as second-class citizens compared to the 

securities side; second, the need to increase our penalty regime. We 

have these antiquated penalties where we only charge very little; 

and third, dealing with high-frequency traders, these traders I call 

cheetah traders, no mention of them in Dodd-Frank because they 

weren’t seen as a problem. The Flash Crash of 2010 happened just 

a couple of months before the bill. So to the extent you want to engage in that, I am happy to talk about it whenever. 

And I do thank you for the opportunity to be here, Mr. Chairman. 

[The prepared statement of Mr. Chilton follows:]

PREPARED STATEMENT OF HON. BART CHILTON, COMMISSIONER, COMMODITY

FUTURES TRADING COMMISSION, WASHINGTON, D.C. 

Good morning, Chairman Conaway, Ranking Member Boswell, and Members of 

the Subcommittee. Thank you for the opportunity to be with you today regarding 

the harmonization of global derivatives market regulatory reform. The Subcommittee’s oversight of the CFTC is critical to the work we do and I appreciate your attention to this and other matters. It is a pleasure, as it was last year, to testify alongside Commissioner Sommers, the Chair of our global Markets Advisory Committee 

(GMAC). She does a superb job. 

Today, I’m pleased to discuss the progress we’ve made, as well as some of the 

challenges we’ve encountered in implementing the Wall Street Reform and Consumer Protection Act of 2010—otherwise known as Dodd-Frank. We are always 

guided by the law and in this case we also have been considering the 2009 Pittsburgh G20 Communique ́ (reaffirmed this year at the G20 Mexico summit), which 

set forth key directives for December 2012 implementation of clearing, trading, reporting, and prudential rules for G20 member countries. The recent statement 

issued by international financial regulators is a welcome signal that we’ve made significant progress in this area. 

Dodd-Frank is a good and needed law. While it is our law—a U.S. law—these are 

global, interrelated financial markets and financial firms. They are connected and 

correlated and rules and regulations need to be attentive to that fact. Dodd-Frank 

can, if we implement it correctly, avoid systemic risk to our economy and make markets more efficient and effective and devoid of fraud, abuse and manipulation. But, 

I said ‘‘if’’ we implement it correctly. 

We’ve known since passage of Dodd-Frank that, unless we strike the right balance 

and provide appropriate guidance and relief on cross-border issues, we risk significant market disruption and migration, as well as regulatory arbitrage, due to an 

imbalance in global regulatory scope and content. As Chairman Conaway cautioned 

8

in an August letter, ‘‘Absent consistent regulatory standards proposed by our own 

domestic regulators, effective coordination between the U.S. and foreign regulators 

would seem virtually impossible.’’ With the leadership of our Chairman and Commissioner Sommers, we have engaged in an international dialogue to move forward 

on a balanced approach to these regulations. 

In that regard, the entire regulatory process has taken longer than Dodd-Frank 

deadlines. Most regulations were to be completed by July of 2011. The European 

Union appeared perhaps 2 years behind the U.S. at the time of Dodd-Frank’s passage. It appeared that if the U.S. went first, and by 2 years so, the impact could 

create havoc for markets and market participants. Since the law passed, there have 

been those (including some on this Subcommittee) who have urged regulators to go 

slow. Particularly as to the impact of the new law on the international front, they 

were right. The regulatory reform rulemaking process has shown us that we needed 

much more information about the over-the-counter (OTC) space in order to promulgate appropriate and reasonable rules. We’ve proposed and re-proposed and extended comment periods and amended our rules, provided comprehensive guidance, 

and where needed, appropriate relief. It has not always been a graceful exercise, but 

by and large, I believe we have gotten things right. If we haven’t, we’ll hear about 

it. And we’ve shown that we can be flexible in implementation content and timing. 

The result is that during these delays, the rest of the world, and particularly the 

European Union, has caught up to us. It now appears that EU regulations will be 

implemented in a matter of months after U.S. rules may be finalized, as opposed 

to the 2 years originally envisioned. 

In June, we proposed interpretive guidance and exemptive relief on 

extraterritoriality issues. We are now poised to provide final guidance in this area, 

to give clarity as to the application of Dodd-Frank on those operating outside our 

territorial borders. We need to ensure that we strike that correct balance in carrying 

out the mandates of the law, and at the same time confirm that appropriate substituted compliance is available to market participants. 

Given that global financial reform regulations can be completed on a more similar 

time horizon, it’s clear to me that we need to provide for phased-in compliance and 

appropriate relief from rules for an interim period—perhaps 5 or 6 months. We do 

not want to repeat the process we—and the markets—underwent in October. In that 

instance, market participants were unclear what things would truly be required on 

the October 12th compliance date. We ended up working it all out, but it should 

have, and could have, been done in a more open and streamlined fashion. We need 

to avoid that now as we approach January 1, 2013 implementation of certain rules 

and regulations. This would give markets and participants time to comply with the 

new regulatory environment and also would provide assurance to global markets 

and regulators that we are not causing unnecessary market disruptions. I’ve made 

specific recommendations which are:

1. Extend the narrower, territorial definition of U.S. Person used in the CFTC’s 

October 2012 staff no-action letter.

2. U.S. and foreign SD and MSP registrants would have interim relief from 

compliance with external business conduct standards, and during the interim 

period, should operate under a ‘‘good faith’’ compliance standard.

3. Allow non-U.S. dealers to not register when facing registered U.S. swaps 

dealers. (i.e., their obligation to register would be based on swaps with U.S. endusers. This is intended to reduce the incentive for non-U.S. G20 dealers to conduct their swaps with foreign branches and affiliates of U.S. SDs and MSPs as 

opposed to trading with regulated U.S. SDs and MSPs.)

4. Provide relief as to the swaps dealing aggregation standard (i.e., swap dealing 

counting toward the de minimis level would happen on an individual entity, not 

enterprise level).

These seem to be common-sense measures that can be taken which would ease 

the transition to compliance, and reduce incentives for regulatory arbitrage, or a 

race to the thinnest rule book. 

Finally, we need to immediately respond to those who have requested relief from 

the Agency. I’m not suggesting we will grant exemptions, but at the least we need 

to respond . . . and now. Furthermore, in the limited meantime prior to requiring 

compliance, it would not be appropriate, reasonable, or responsible for the Commission to proceed against entities for non-compliance with Dodd-Frank rules unless 

and until they have received a response from the Agency to an existing request. 

And, importantly, I cannot envision the Commission moving forward with such an 

action. 

9

Separate from these issues of international harmonization, I look forward to working with the Subcommittee on the CFTC reauthorization this next year. In that regard, I believe we should do at least three things: First, increase penalties for those 

that violate our financial laws; second, create a futures insurance fund; and third, 

we need to develop a meaningful oversight regime for high frequency traders. I have 

a one-pager on each of these matters for Members and I will leave it to the Chairman if these three pages should be included in the hearing record. 

Thank you for the opportunity to present this testimony today.

The CHAIRMAN. Thank you, Mr. Chilton. 

Ms. Sommers? 

STATEMENT OF HON. JILL E. SOMMERS, COMMISSIONER, 

COMMODITIES FUTURES TRADING COMMISSION,

WASHINGTON, D.C. 

Ms. SOMMERS. Good morning, Chairman Conaway, Ranking 

Member Boswell, and Members of the Committee. Thank you for 

inviting me to testify today. It is a pleasure to be here with my colleagues to speak about the challenges facing U.S. and international 

markets resulting from the Dodd-Frank derivatives reforms. 

I have worked in the derivatives industry for over 15 years and 

have been a Commissioner at the CFTC since August of 2007. During my time at the Commission, I have served as Chairman and 

sponsor of the CFTC’s Global Markets Advisory Committee and 

have represented the Commission at meetings of the International 

Organization of Securities Commissions. I am pleased to give you 

my perspective on the enormous challenges facing regulators across 

the globe in their quest to meet the commitments on OTC derivatives reform made by the G20 leaders in 2009, and in particular, 

the challenges for U.S. regulators in interpreting the cross-border 

scope of Dodd-Frank. 

In May of 2011, Commissioner Chilton and I testified in front of 

this Subcommittee regarding the harmonization of global derivatives reform and its impact on U.S. competitiveness and market 

stability. At that time, I discussed three concerns: first, there were 

substantive differences between derivatives reform in the U.S. and 

in other jurisdictions; second, other jurisdictions were not as far 

along in their reform process, which could harm the global competitiveness of U.S. businesses due to regulatory arbitrage; and third, 

our failure to clarify how our rules would apply internationally was 

creating a great deal of uncertainty, both in the U.S. and abroad. 

Although my concerns today remain the same, since then, I have 

had the benefit of significant dialogue and feedback from foreign 

regulators and market participants regarding the cross-border proposal the CFTC released in June. I have two specific solutions: 

first, the Commission should not act outside the jurisdictional limits that were set for us by Congress. Section 722(d) of the DoddFrank Act, which added Section 2(i) to the Commodity Exchange 

Act, provides that the Act ‘‘shall not apply to activities outside the 

United States unless those activities have a direct and significant 

connection with activities in, or affect on, commerce of the United 

States, or contravene rules or regulations prescribed by the Commission designed to prevent evasion.’’ 

In my view, those words direct and significant should be read together. It should not be enough that a swap transaction involves 

a U.S. counterparty. Rather, the connection to the United States 

10

must be direct and significant. I do not believe that every single 

swap a U.S. person enters into, no matter what the swap or where 

it is transacted, has a direct and significant connection with activities in, or effect on, commerce of the United States. 

Second, it is imperative for U.S. regulators to harmonize their 

approach with global regulators on the extraterritorial reach of 

Dodd-Frank. While we have been consulting regularly with the 

SEC and other regulators, our approaches are far from consistent. 

It does no good to coordinate with our fellow regulators if we are 

not going to listen to them or incorporate their suggestions. The 

Commission has worked for decades to establish relationships with 

our foreign counterparts built on respect, trust, and information 

sharing, which has resulted in a successful history of mutual recognition of foreign regulatory regimes in the futures and options 

markets spanning over 20 years. 

At the Pittsburgh Summit in 2009, all G20 nations agreed to a 

comprehensive set of principles for regulating the OTC derivatives 

markets. We should rely on their regional expertise and try to the 

best of our ability to avoid overlapping rules or dual regulations. 

While the pace of implementing reforms among the various jurisdictions has been uneven, I have no reason to believe that comparable or equivalent regulation is unachievable. It is obvious that 

more time is needed to facilitate an orderly transition to a regulated environment. This task is not going to be easy and we have 

a long way to go, but we must continue to work with our colleagues 

both domestically and internationally to coordinate our approaches 

to regulation of the global swaps market. Global coordination is key 

to successfully regulating these global markets. In order to accomplish harmonization with the rest of the world both in substance 

and timing, my hope is that in the coming days the Commission 

will issue clear and concise relief from having to comply with various Dodd-Frank requirements for both domestic and foreign swap 

entities. These are very complex issues but we should not make 

cross-border guidance more confusing than necessary. 

I am grateful for the opportunity to be able to discuss these important issues and happy to answer any questions. 

[The prepared statement of Ms. Sommers follows:]

PREPARED STATEMENT OF HON. JILL E. SOMMERS, COMMISSIONER, COMMODITY

FUTURES TRADING COMMISSION, WASHINGTON, D.C. 

Good morning, Chairman Conaway, Ranking Member Boswell, and Members of 

the Committee. Thank you for inviting me to testify on the challenges facing U.S. 

and international markets resulting from the Dodd-Frank derivatives reforms. I 

have worked in the derivatives industry for over fifteen years and have been a Commissioner at the Commodity Futures Trading Commission (CFTC or Commission) 

since August of 2007. During my time at the Commission I have served as the 

Chairman and sponsor of the CFTC’s Global Markets Advisory Committee (GMAC) 

and have represented the Commission at meetings of the International Organization 

of Securities Commissions (IOSCO), one of the principal organizations formed to develop, implement and promote internationally recognized and consistent standards 

of regulation, oversight and enforcement in the securities and derivatives markets. 

I am pleased to give you my perspective on the many challenges facing regulators 

across the globe in their quest to meet the commitments on over-the-counter (OTC) 

derivatives reform made by the G20 Leaders in 2009 and, in particular, the challenges presented in interpreting the cross-border scope of Dodd-Frank. The views I 

present today are my own and not those of the Commission. 

11

Section 722(d) of the Dodd-Frank Act, which added Section 2(i) to the Commodity 

Exchange Act, provides that the Act 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, or contravene rules or regulations 

prescribed by the Commission designed to prevent evasion. In 2011 the Commission 

acknowledged the growing uncertainty surrounding the extraterritorial reach of 

Dodd-Frank and in August of that year held a 2 day roundtable, followed by a public comment period. In July 2012 the Commission published proposed guidance setting forth an interpretation of how it might construe Section 2(i), followed by another round of public comment. The guidance included a proposed definition of ‘‘U.S. 

person,’’ the types and levels of activities that would require foreign entities to register as U.S. swap dealers or major swap participants (swap entities), and the areas 

in which such swap entities might be required to comply with U.S. law and those 

in which the Commission might recognize substituted compliance with the law of 

an entity’s home jurisdiction. 

On November 7, 2012 I convened a meeting of the GMAC to further discuss the 

Commission’s proposed interpretive guidance and to identify questions and areas of 

concern in implementing the CFTC’s proposed approach. A number of foreign jurisdictions were represented, including regulators from Australia, the European Commission, the European Securities and Markets Authority, Hong Kong, Japan, Quebec and Singapore. Representatives of the U.S. Securities and Exchange Commission (SEC) also attended to discuss the SEC’s perspective. A common theme that 

emerged was concern over the breadth of CFTC’s proposed definition of ‘‘U.S. person,’’ the implications of having to register in the U.S., the uncertainty of the Commission’s proposal on substituted compliance, and the need to identify areas where 

complying with a particular U.S. requirement might conflict with the law of a foreign swap entity’s home country regime. 

On November 28, 2012 regulatory leaders from Australia, Brazil, the European 

Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United 

States met in New York to continue the dialogue. In a press statement issued after 

the meeting the leaders supported the adoption and enforcement of robust and consistent standards in and across jurisdictions, and recognized the importance of fostering a level playing field for market participants, intermediaries and infrastructures, while furthering the G20 commitments to mitigating risk and improving 

transparency. The leaders identified five areas for further exploration, including:

• the need to consult with each other prior to making final determinations regarding which products will be subject to a mandatory clearing requirement and 

to consider whether the same products should be subject to the same requirements in each jurisdiction, taking into consideration the characteristics of each 

domestic market and legal regime;

• the need for robust supervisory and cooperative enforcement arrangements to 

facilitate effective supervision and oversight of cross-border market participants, 

using IOSCO standards as a guide;

• the need for reasonable, time-limited transition periods for entities in jurisdictions that are implementing comparable regulatory regimes that have not yet 

been finalized and to establish clear requirements on the cross-border applicability of regulations;

• the need to prevent the application of conflicting rules and to minimize the application of inconsistent and duplicative rules by considering, among other 

things, recognition or substituted compliance with foreign regulatory regimes 

where appropriate; and

• the continued development of international standards by IOSCO and other 

standard setting bodies.

The authorities agreed to meet again in early 2013 to inform each other on the 

progress made in finalizing reforms in their respective jurisdictions and to consult 

on possible transition periods. Future meetings will explore options for addressing 

identified conflicts, inconsistencies, and duplicative rules and ways in which comparability assessments and appropriate cross-border supervisory and enforcement 

arrangements may be made. 

The Commission has worked for decades to establish relationships with our foreign counterparts, built on respect, trust, and information sharing, which has resulted in a successful history of mutual recognition of foreign regulatory regimes in 

the futures and options markets spanning 20+ years. At the Pittsburgh summit in 

2009 all G20 nations agreed to a comprehensive set of principles for regulating the 

OTC derivatives markets. We should rely on their regional expertise. While the pace 

of implementing reforms among the various jurisdictions has been uneven, I have 

12

no reason to believe that comparable or equivalent regulation is unachievable. It is 

obvious that more time is needed to facilitate an orderly transition to a regulated 

environment. It is important that assessments of comparability be made at a high 

level, keeping in mind the core policy objectives of the G20 commitments rather 

than a line-by-line comparison of rule books. It is also important to avoid creating 

an unlevel playing field for U.S. firms just because the U.S. is ahead of the rest 

of the world in finalizing reforms. U.S. firms should not be disadvantaged by tight 

compliance deadlines set by the CFTC. Global coordination is key. It is my hope 

that in the coming days the Commission will issue clear and concise relief from having to comply with various Dodd-Frank requirements, for both domestic and foreign 

swap entities, until we have a better sense of the direction in which we are all headed. 

I am grateful for the opportunity to speak about these important issues and am 

happy to answer any questions.

The CHAIRMAN. Right, thank you, Ms. Sommers. 

I need unanimous consent to insert this statement in the record 

just ahead of Mr. Kono’s testimony. Mr. Kono is recognized as a 

representative of a foreign organization whose statements are 

being provided under the terms of diplomatic immunity given to 

the officials of the Government of Japan. The statements are being 

given in cooperation and freely for the information of the U.S. 

House of Representatives and the House Committee on Agriculture. 

So thank you, Mr. Kono. 

Mr. Kono, 5 minutes? 

STATEMENT OF MASAMICHI KONO, VICE COMMISSIONER FOR 

INTERNATIONAL AFFAIRS, FINANCIAL SERVICES AGENCY 

OF JAPAN; CHAIRMAN OF THE BOARD, INTERNATIONAL

ORGANIZATION OF SECURITIES COMMISSIONS, TOKYO, 

JAPAN 

Mr. KONO. Thank you, Mr. Chairman. 

Mr. Chairman and Members of the Committee, it is my great 

honor and pleasure to be here today to speak to you about issues 

concerning cross-border regulation of OTC derivatives markets. My 

name is Masamichi Kono representing the Financial Services Agency of Japan. I am also currently the Chairman of the Board of 

IOSCO, the International Organization of Securities Commissions. 

But I must mention that any views I express today are not necessarily the views of the organizations that I represent. 

You will recall that G20 leaders agreed at the Pittsburgh Summit in September 2009 on the basic elements of reform and OTC 

derivatives markets, and a number of jurisdictions, including U.S. 

and Japan, have been making significant progress in implementing 

the G20 commitments towards the agreed deadline of the end of 

2012. Actually, the regulations which Japan has already implemented from November this year, not exactly identical to U.S. regulations, but are fully consistent with the objectives of the G20 

commitments to improve transparency in the derivatives markets, 

mitigate systemic risk, and protect against market abuse. In this 

respect, our laws and regulations, which we have implemented 

from November of this year, share the same goals as the DoddFrank Act. 

One important issue that has surfaced lately, as having been 

mentioned by previous speakers, is how to deal properly with the 

risks of cross-border activities and transactions in OTC derivatives, 

which is very much a globalized market. One point that I would 

13

wish to make today is that such risks need not be addressed by 

extraterritorial application of U.S. laws and regulations. Rather, 

the U.S. authorities could rely on foreign regulators upon establishing, of course, that the foreign regulators have the required authority and competence to exercise appropriate regulation and oversight over those entities and activities. This is what we consider as 

the most efficient and effective approach in line with the principles 

of international comity between sovereign jurisdictions. 

Such reliance on foreign regulators ensures that there is no conflict or overlap of applicable rules to entities operating cross-border 

and to transactions that take place across borders. It not only enables an efficient and effective use of our limited supervisory resources, but also, even more importantly, it removes legal uncertainty and significantly reduces the compliance costs of market participants and infrastructure operators in all jurisdictions. This will 

ultimately lead to significant cost savings for the investor and for 

the taxpayer as well, and actually in some cases, certain activities 

or transactions could be prevented from taking place because of 

conflicting regulations by different jurisdictions, and this can be 

avoided through enhanced coordination and cooperation between 

regulators. 

Thus, there are now growing calls internationally for taking the 

required steps to avoid conflicting or overlapping regulation and for 

demonstrating much greater coordination and cooperation among 

regulators. And regulators around the world will have to respond 

to those calls. Actually, it is very much in this spirit that a group 

of regulators, including ourselves, issued on December 4 a joint 

press statement entitled, Operating Principles and Areas of Exploration in the Regulation of the Cross-Border Derivatives Market. Now, in recent months, foreign regulators have expressed their 

concerns with regard to the CFTC’s proposed reforms, primarily because they find potential conflicts or overlaps with our own rules 

that are or will be implemented soon. In this regard, we of course 

appreciate very much the ongoing efforts by the CFTC in addressing those issues raised by foreign regulators, but much needs to be 

done. 

Now, I might not have the time to go through each and every 

subject, but let me try very briefly. First, it is important that the 

details of the applicable laws and regulations are made clear as 

much as possible before their implementation in order to minimize 

regulatory uncertainty. Second, once the details are made available, regulators should work together to avoid outright conflicts 

and minimize overlaps as much as possible, ideally again before 

the rules are applied in their jurisdictions. Third, a sufficient transition period and adequate relief measures for foreign entities and 

infrastructure operators are needed. Fourth, when adopting an approach of reliance on foreign regulators, it should be based on a 

clear recognition of the foreign regulators’ primary authority and 

competence. 

And in the U.S., our view is that the scope of application of substituted compliance can be further extended to a broader set of regulated entities and transaction requirements. And of course as a 

national regulator, we would like to be recognized as a primary 

regulator of the entities established in Japan. 

14

Fifth, cross-border transactions by their very nature will be subject to regulations of two or more jurisdictions so we need arrangements across different jurisdictions to avoid duplication. And in 

Japan, we have taken steps to refrain from applying our rules to 

cross-border transactions in anticipation of an international coordination arrangement at the outset of our implementation. 

Now, as I mentioned, we have made some efforts in recent days. 

We look forward to continuing to work with our counterparts in 

other jurisdictions to achieve this goal, and certainly, we would like 

to do our best to minimize the cost to the economy that has been 

referred to earlier. 

So thank you very much for providing this opportunity to share 

my views with you today, and let me emphasize again that we are 

very much intending to cooperate and coordinate with each other 

as much as possible in the coming days and weeks. It is a huge 

challenge but one that has to be pursued if we are to have globally 

interconnected financial markets that serve well to help those in 

the real economies worldwide. 

Thank you very much. 

[The prepared statement of Mr. Kono follows:]

PREPARED STATEMENT OF MASAMICHI KONO, VICE COMMISSIONER FOR

INTERNATIONAL AFFAIRS, FINANCIAL SERVICES AGENCY OF JAPAN; CHAIRMAN OF

THE BOARD, INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS, TOKYO, 

JAPAN

Introduction 

Mr. Chairman and Members of the Subcommittee on General Farm Commodities 

and Risk Management. It is my great honor and pleasure to be invited to today’s 

hearing to speak to you about issues concerning cross-border regulation of OTC derivatives markets. My name is Masamichi Kono, Vice Commissioner for International Affairs at the Financial Services Agency of Japan. In my capacity, I represent my Agency in various international organizations of financial regulators and 

supervisors. I am also currently the Chairman of the Board of IOSCO, i.e., the International Organization of Securities Commissions. I must mention that any views I 

express today are not necessarily identical to the official views of the organizations 

that I represent. 

In response to the financial crisis that started in 2007–2008, G20 Leaders agreed 

at the Pittsburgh Summit in September 2009 that all standardized OTC derivative 

contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest, and 

OTC derivative contracts should be reported to trade repositories. 

A number of jurisdictions, including Japan and the United States, have been making significant progress in implementing the G20 commitments in an internationally 

consistent and coordinated manner towards the agreed deadline of end-2012. The 

regulations which Japan implemented from November this year are not identical to 

the U.S. regulations, but are fully consistent with the objectives of the G20 commitments to improve transparency in the derivatives markets, mitigate systemic risk 

and protect against market abuse. In this respect, our laws and regulations which 

we have implemented from November this year share the same goals as the DoddFrank Act. 

As to the cross-border application of national laws to OTC derivatives, we can understand the CFTC’s concern that risks emanating from an overseas commercial 

presence of a U.S. financial group could directly flow back to the U.S. and cause 

significant systemic disruptions, and this should be avoided. The same would apply 

if a non-U.S. financial group had significant commercial presence in U.S. territory. 

We believe, however, that such risks need not be addressed by extraterritorial application of U.S. laws and regulations. 

If the overseas commercial presence of the U.S. financial group or the non-U.S. 

financial group is appropriately regulated by foreign regulators, the U.S. authorities 

could rely on the foreign regulators upon establishing that the foreign regulators 

have the required authority and competence to exercise appropriate regulation and 

15

oversight over those entities and activities abroad. This is what we consider as proper treatment in line with the principles of international comity between sovereign 

jurisdictions. 

Such reliance on foreign regulators ensures that there is no conflict or overlap of 

applicable rules to entities operating cross-border, and to transactions that take 

place across borders. It not only enables an efficient and effective use of the limited 

supervisory resources of the regulator, but also, even more importantly, removes 

legal uncertainty and significantly reduces the compliance costs of market participants and infrastructure operators in all jurisdictions. This will ultimately lead to 

significant cost-savings for the investor, and for the taxpayer. In some cases, certain 

activities or transactions could be prevented from taking place because of conflicting 

regulation, and this can be avoided through enhanced coordination and cooperation 

between regulators. Needless to say, such reliance can only be possible when mutual 

trust is established between regulators, and appropriate supervisory arrangements 

exist between them. 

In recognition of the above, there are now growing calls internationally for taking 

steps to avoid conflicting or overlapping regulation, and for demonstrating much 

greater coordination and cooperation among regulators. Regulators around the world 

will have to respond to those calls. It is very much in this spirit that a group of 

regulators including ourselves issued on December 4 a joint press statement entitled 

‘‘Operating Principles and Areas of Exploration in the Regulation of the Cross-border OTC Derivatives Market’’. I will come back to explain the background of this 

important press statement later. 

OTC Derivatives Market Reforms in Japan 

Since September 2009, Japan has exerted its utmost efforts to put in place legislative and regulatory measures to reform the OTC derivatives markets, for the purpose of fulfilling the G20 commitments. Our Financial Instruments and Exchange 

Act (FIEA) has been amended in two stages. 

The first stage of legislation dates back to May 2010, when mandatory clearing 

requirements and requirements to report transactions to trade repositories were introduced. Those amendments took effect from 1 November this year, with phase-in 

arrangements for product designation and reporting requirements. 

As to the second stage, our Diet passed this September legislation introducing requirements for usage of electronic trading platform (ETP) and for enhancing price 

transparency. In consideration of the need to provide sufficient time for preparation 

on the part of market participants, and to address the potential impact on market 

liquidity that those measures could have, the implementation of this second stage 

of legislation will be phased in for a period of up to 3 years. 

With respect to the mandatory clearing requirement that entered into force last 

month, only Japanese index-based CDSs (i.e., the iTraxx Japan Index Series) and 

plain-vanilla Japanese Yen-denominated Interest Rate Swaps (IRS) with reference 

to LIBOR are subject to mandatory clearing. The scope of products subject to mandatory clearing will be expanded to the products, such as JPY-denominated IRSs 

with reference to TIBOR, foreign currency (USD and EURO) denominated IRSs, and 

single-name CDSs referencing Japanese companies, taking into consideration such 

factors as the volume of transactions and the degree of standardization. 

Also, at the outset, the application of mandatory central clearing requirements is 

limited to transactions between large domestic financial institutions registered 

under the FIEA, who are members of licensed clearing organizations. In this regard, 

it should be noted that currently in Japan there is only one licensed CCP under the 

amended FIEA. Foreign CCPs are invited to be licensed in Japan, with less onerous 

requirements applicable in light of their foreign status. Going forward, the clearing 

requirements could be expanded to transactions between the above financial institutions and foreign financial institutions (not registered under FIEA), taking into account international coordination efforts currently underway on cross-border regulation. 

On reporting requirements, financial institutions registered under the FIEA are 

required to report their OTC derivatives transactions to trade repositories (TRs) for 

products such as (i) credit derivatives, and (ii) forward, option and swap transactions in relation to interest rates, foreign exchanges, and equities. 

Need To Avoid Conflicting Or Overlapping Cross-Border Regulations 

In recent months, foreign regulators have expressed their concerns with regard 

to the CFTC’s proposed reforms primarily because they find potential conflicts or 

overlaps with their own rules that are or will be implemented soon. Certainly the 

concerns described below are particularly relevant with regard to U.S. regulations, 

but it should be noted that many of them are, by nature, pertinent to any set of 

16

national or regional rules applied to entities operating cross-border and to cross-border transactions. In this regard, we appreciate very much the ongoing efforts by the 

CFTC in dealing with those issues raised by foreign regulators. 

First, it is important that the details of the applicable laws and regulations are 

made clear as much as possible before their implementation, in order to minimize 

regulatory uncertainty. 

Regarding the need for this transparency up front, more clarity on the detailed 

elements of the applicable rules is urgently requested in the case of the U.S. The 

examples of such elements are: the definition of a U.S. person, the terms and conditions for applying substituted compliance to foreign entities and cross-border transactions, and the method to be employed for aggregating transaction volumes of 

group firms worldwide in relation to the de minimis threshold for registration of 

swap dealers. 

Second, once the details are made available, regulators should work together to 

avoid outright conflicts and minimize overlaps as much as possible, ideally before

the rules are applied in their jurisdictions. Reliance on foreign regulators can be arranged through approaches of mutual recognition, substituted compliance, and exemptions, or a combination of those approaches. 

Starting the implementation of U.S. regulations under the current circumstances 

has already created uncertainty in the markets. If not managed properly, significant 

reductions in market liquidity and/or shifts in transaction venues or counterparties 

could occur as a result. 

Third, a sufficient transition period and adequate relief measures for non-U.S. entities and infrastructure operators are needed to address the difficulties that they 

face in complying with U.S. regulations. A certain amount of time is also required 

to work to avoid regulatory conflicts and inconsistencies arising from differences in 

the content and the timing of implementation of national or regional regulations. 

Foreign market participants and regulators would require some additional time to 

fully prepare for the new U.S. requirements. In Japan, as described above, we are 

taking a two-stage approach in introducing new rules, and providing sufficient time 

for their phased implementation. 

Fourth, when adopting an approach of reliance on foreign regulators, it should be 

based on a clear recognition of the foreign regulators’ primary authority and competence in exercising effective regulation of entities and infrastructures based in its 

jurisdiction. 

In the U.S., to the extent that the CFTC’s proposed regulations have revealed, the 

scope of application of substituted compliance can be further extended to a broader 

set of regulated entities and transaction-level requirements. As a national regulator, 

we would like to be recognized as the primary regulator of the entities established 

in Japan, and the CFTC is invited to rely on our supervisory authority and competence as much as possible. Whether a swap dealer qualifies for substituted compliance should be determined on recognition of equivalent regulation on a country-bycountry basis, not on an entity-by-entity or rule-by-rule basis. In Japan, with respect to foreign CCPs and trade repositories, they are subject to less onerous requirements compared to CCPs and trade repositories established in Japan, if they 

are properly supervised by foreign regulators under supervisory cooperation arrangements with FSA Japan. 

Fifth, cross-border transactions, by their nature, will be subject to regulations of 

two or more jurisdictions, if no arrangements are made between the relevant regulators to avoid duplication. If those duplicative requirements are not entirely conflicting or inconsistent, market participants could still cope, although there may still 

be additional costs involved in ensuring compliance with several different rules, 

such as in the case of duplicative data reporting requirements. But, if those rules 

clash with each other, arrangements are needed between regulators to enable the 

transaction to take place legally. Such cases can arise in the context of central clearing requirements. 

In Japan, we have so far deliberately refrained from applying our rules to crossborder transactions in anticipation of an international coordination arrangement on 

regulation of cross-border transactions which we strongly hope to be developed soon. 

When the U.S. and Japan require central clearing for transactions of the same 

product, such as JPY-denominated IRSs with reference to LIBOR, market participants will not be able to enter into transactions without breaching the regulations 

of either the U.S. or Japan, unless there is a CCP licensed or registered both in the 

U.S. and Japan In this regard, a Japanese clearing organization licensed under 

FIEA (Japan Securities Clearing Corporation (JSCC)) is currently seeking CFTC 

registration as a derivatives clearing organization (DCO). The challenge for JSCC, 

however, is that it would need more time than its U.S. counterparts to fully comply 

17

with U.S. regulation, and a request is being made to grant some additional time for 

it to be fully compliant. 

Need for Better International Coordination and the Initiatives Underway 

As noted above, there are a number of important issues we need to address with 

respect to cross-border application of OTC derivatives regulations. To address these 

issues, there is a much greater need for international coordination and cooperation 

among regulators. 

The G20 Ministers of Finance and Central Bank Governors agreed in Mexico City 

this November to put in place the legislation and regulation for OTC derivatives reforms promptly and act by end-2012 to identify and address conflicts, inconsistencies 

and gaps in their respective national frameworks, including in the cross-border application of rules. The Financial Stability Board, in its latest report on OTC derivatives market reforms, urged key, high-level OTC derivatives market regulators from 

G20 jurisdictions to pursue further discussions before the end-2012 deadline to (i) 

identify the cross-border application of rules to infrastructure, market participants, 

and products; (ii) identify concrete examples of any overlaps, inconsistencies and 

conflicts; and (iii) develop options for addressing these issues. 

In response to the growing calls, leaders of regulators of major OTC derivatives 

jurisdictions, including regulators from the U.S., EU and Japan, met in New York 

City at the end of November, and agreed to a set of high-level operating principles 

and identified areas for further exploration in the regulation of the cross-border 

OTC derivatives market. This effort culminated in the joint press statement published last week which I referred to earlier. In pursuing this work, we have appreciated very much the leadership taken by the CFTC and the SEC. Regulators have 

agreed to regularly meet and consult with one another, going forward. The next 

meeting is scheduled to be in Brussels early next year. 

The joint press statement was intended to address important issues requiring 

international coordination and cooperation, and to present a useful way forward. 

This includes (i) an understanding on clearing determinations (prior-consultation 

when making clearing determinations), (ii) an understanding on sharing of information and supervisory and enforcement cooperation (relevant supervisory authorities 

enter into supervisory and enforcement cooperation arrangements), (iii) an understanding on timing (an orderly implementation process and a reasonable limited 

transition period) and (iv) areas of exploration regarding the scope of regulation and 

recognition or substituted compliance for cross-border compliance (possible approaches to prevent the application of conflicting rules and the desire to minimize 

the application of inconsistent and duplicative rules). 

We found the outcome of this discussion extremely useful in further promoting coordination and cooperation among themselves, and will continue to meet and consult 

regularly to coordinate in order to address any outstanding issues. 

Last but not least, with the deadline of G20 commitment coming near, we will 

continue to need to push ahead aggressively to put in place the legislation and regulation for OTC derivatives reforms promptly and act to identify and address conflicts, inconsistencies and gaps in our respective national frameworks, including in 

the cross-border application of rules, so that we can achieve the G20’s goals of improving transparency in the derivatives markets, mitigating systemic risk, and protecting against market abuse. We should make use of the opportunity that international forums such as IOSCO and the FSB could provide in supporting the work 

of OTC derivatives market regulators. 

Thank you very much for providing this opportunity to share my views with you 

today. Let me emphasize once again that, as agreed by international regulators last 

month, regulators intend to cooperate and coordinate each other much more closely 

and address the important issues related to cross-border regulation. It is a huge 

challenge, but one that has to be pursued, if we are to have globally interconnected 

financial markets that serve well to help growth in the real economies worldwide. 

Finding sensible, pragmatic cross-border solutions for global OTC derivatives trading is a test case for the global financial reform process. And it is urgent. We would 

be most grateful if you could provide your insights or suggestions in this regard. 

Now I will be delighted to respond to any questions you may have.

The CHAIRMAN. Thank you, Mr. Kono. 

Mr. Pearson is also recognized as a representative of a foreign organization whose statements are being provided under the terms of 

the diplomatic immunity given to officials of the European Union. 

The statements are being given in cooperation and freely for the inVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00021 Fmt 6633 Sfmt 6601 I:\DOCS\112-35\77833.TXT BRIAN
18

formation of the U.S. House of Representatives and the House 

Committee on Agriculture. 

Mr. Pearson, you are recognized for 5 minutes. 

STATEMENT OF PATRICK PEARSON, HEAD, FINANCIAL

MARKET INFRASTRUCTURES UNIT, INTERNAL MARKET AND 

SERVICES DIRECTORATE GENERAL, EUROPEAN

COMMISSION, BRUSSELS, BELGIUM 

Mr. PEARSON. Thank you, Chairman Conaway, Ranking Member, 

and Members of the Subcommittee, for inviting me to testify today. 

My name is Patrick Pearson. I represent the European Commission. We have the rulemaking powers in this specific area together 

with the European Securities Market Authority (ESMA). 

Now, the reason for our work and the reason why we are here 

today are absolutely persuasive. The financial crisis exposed serious shortcomings to the OTC derivatives markets, it amplified 

shocks, and it impacted our economies in several ways. Our economies, our companies, our citizens, our taxpayers in the United 

States as well as in Europe and other parts of the globe are still 

paying for these shortcomings. 

We have reached a global consensus. We have a plan. The United 

States and European Union have shown genuine leadership in 

pushing for global regulatory reform. Now, these derivative reforms 

involve a significant change in regulation to cover both the regulation of firms, legal entities; it covers the regulation of transactions, 

of contracts, and we have been working in parallel with the United 

States’ agencies over the past 30 months to adopt the legislative reforms to achieve common goals. 

The United States adopted the Dodd-Frank Act. Two months 

later, the European Union made its own proposals—European Market Infrastructure Regulation (EMIR). That legislation entered into 

force on the 16th of August of this year and, as in the United 

States, many technical rules will need to enter into force in the 

coming weeks to enact these requirements. The European Union 

hopes to enact its technical requirements before this Christmas. 

Now, the Commission has worked closely with the CFTC and the 

SEC over the past years, often successfully. We have tried to align 

our requirements with your approaches. The Chairman of the 

CFTC and European Commissioner Michel Barnier, have met in 

Brussels and in Washington on a number of occasions to discuss 

derivatives reforms, a very useful process. International regulators, 

as Mr. Kono has made clear, have met recently in New York. We 

made some progress, cooperation, info exchange, consultation; but 

crucially, there is one key area where there is no progress and no 

agreement, and that is cross-border work. 

And why is that crucial? It is because that $640 trillion OTC derivatives market is global. The Euro, the dollar, are the most important underlying currencies for derivatives. And the global nature of OTC markets with the two counterparties to transactions 

frequently located in different jurisdictions to each other or in a different location to the infrastructure being used makes the effective 

use of regulation absolutely critical. So we need rules that work not 

only for a national jurisdiction but also rules that work between jurisdictions. And even reforms that are consistent and coherent 

19

within one jurisdiction can have significant adverse impacts applied to cross-border transactions, even if we have apparently similar rules. 

We did a recent detailed analysis of the U.S. and European rules 

and we identified numerous—80 pages—of potential conflicts, inconsistencies, gaps between our rules that have to be addressed. If 

we don’t, many of our collective reform efforts to reduce risk will 

remain obsolete. Example: it is quite possible that two parties to 

the same transaction can be required to trade in different venues, 

clear on different DCOs or CCPs, report to different trade repositories. Trade could be subject to clearing in one jurisdiction and to 

margin requirements in another, and this is particularly relevant 

to corporate end-users. Companies will not be able hedge their 

risks, risks will be concentrated within jurisdictions, and contracts 

simply will not be cleared. We defeated the objectives we agreed to 

attack. 

So what is the problem? There were three. First, scope. We have 

significant concerns with the proposals from the CFTC that would 

extend the territorial reach of its rules to counterparties outside of 

the United States. This immediately creates conflicts, undue burdens to market participants. Firms and traders will fall under two 

rules—U.S. rules and foreign rules. The only choice they have is 

whose rules to break—the United States’ rules or European rules? 

The scope of persons who are subject to the application of our respective rules and regulations must be defined in a narrow manner. It has to be based on the establishment of the counterparty in 

the territory of our jurisdictions. And what is really important is 

that all the counterparties in two jurisdictions are subject to the requirements we all agreed to to ensure global safety. And we believe 

this is better done by ensuring comparability of rules than by overextending the reach of national rules. 

My second point—the principles of recognition of equivalent substituted compliance are critical to a cross-border regulatory regime. 

We believe that the CFTC is too modest in the way it proposes to 

use substituted compliance. It should be applied more broadly. It 

should not only apply to entity requirements but also to transaction 

requirements. It should apply also to transactions between domestic U.S. and a third country counterparty. The CFTC has the powers to do this. It has done this in the past. Why not here? 

Third, registration. Registration might be unavoidable, but if you 

do it, you need to do it from the beginning with recognition and 

substituted compliance. Market participants must have absolute 

possibility and certainty ahead of any registration. Foreign swap 

dealers are being told to register without knowing the complete set 

of rules that will bind them as a consequence up front, how they 

will be applied in an international context, and once registered, you 

cannot de-register. This isn’t Facebook we are talking about. There 

are some significant issues. 

And finally, timing is absolutely essential. We need cross-border 

rules that are right and not just rapid. We are strongly urging U.S. 

regulators not to enforce rules that will obstruct cross-border business before solutions for cross-border transactions have been finalized. The CFTC is intent on introducing its rules where the SEC’s 

intentions in the same field are still unknown to us. Regulatory 

20

certainty is simply not available internationally. And a well known 

saying goes if you want to do something fast, you do it alone; if you 

want to do something right, you do it together. 

So concluding, if we don’t reach agreement on a sensible crossborder approach, then conflicts, inconsistencies, and gaps will persist. Trades won’t take place. It won’t be cleared. It will be reported 

in a fragmented way. Companies in our economies will not be able 

to hedge risks they have to hedge to do business, commercial or financial. And to quote a historian we all know well, Tacitus, ‘‘They 

created a desert and then called it peace.’’ That is what we want 

to avoid here. We need to do this together, the right way. 

Thank you for listening to me. 

[The prepared statement of Mr. Pearson follows:]

PREPARED STATEMENT OF PATRICK PEARSON, HEAD, FINANCIAL MARKET

INFRASTRUCTURES UNIT, INTERNAL MARKET AND SERVICES DIRECTORATE GENERAL, 

EUROPEAN COMMISSION, BRUSSELS, BELGIUM

Chairman Conaway, Ranking Member Boswell, and Members of the Subcommittee, thank you for inviting me to testify at today’s hearing. 

My name is Patrick Pearson, and I am the Head of the Financial Market Infrastructures Unit at the European Commission. The European Commission is responsible for the preparation and enforcement of legislation in the European Union. The 

European Parliament and the Council are responsible for the final enactment of 

that legislation, while the European Commission, together with the European Securities Market Authority (ESMA), has direct rulemaking powers in technical areas 

and in determining the ‘equivalence’ of the rules of foreign countries. 

The financial crisis exposed serious shortcomings with respect to the OTC derivatives market which amplified shocks and impacted our economies in several ways. 

Collateral calls generated by sharp movements in the mark-to-market value of the 

OTC derivative trades drained liquidity buffers and provoked the fire sales of assets. 

Second, the bilateral nature of the OTC derivatives market—between the two parties to the contract—be it dealer and customer or dealer and dealer-created its own 

set of difficulties. When counterparties became concerned about the health of a particular dealer, they moved their business and collateral with them, which worsened 

the funding crunch in the market. Third, when a large counterparty, Lehman Brothers, filed for bankruptcy, it could no longer meet its obligations. Open OTC derivatives positions with its customers were frozen, which created large problems for 

Lehman’s counterparties. Fourth, the opaqueness of the OTC derivatives market 

made the situation much worse because no one had clear insight into the financial 

health of their counterparties. Because there was no easy way to know who was in 

difficulty or not, the incentives were all on the side of assuming the worst—closing 

out open trades, hoarding liquidity, and retreating to the sidelines. 

The crisis made it crystal clear that the regulatory regime had not kept pace with 

the rapid growth of the global OTC derivatives market. In assessing the shortcomings of the OTC derivatives market after the crisis, a global consensus has been 

reached. The United States and the European Union showed genuine leadership in 

pushing for this global consensus. 

Standardizing trades improves transparency and price discovery. This mitigates 

the opaqueness that helped to generate the illiquidity and loss of market function 

evident during the crisis. Clearing such trades through CCPs reduces the aggregate 

amount of risk in the system. In a CCP framework, the bilateral exposures of each 

dealer to one another are replaced by a single set of claims to and from the CCP. 

Inserting a CCP in between two counterparties to a trade reduces the run risk faced 

by a potentially troubled dealer. If trades with the dealer are cleared through a 

CCP, direct exposures to the dealer are eliminated and replaced by exposures to the 

CCP itself. Mandatory reporting of trades to trade repositories is designed to ensure 

that the details of each contract are preserved and available to the regulatory authorities. They will have a full overview of risk in the system. Finally, the fact that 

CCPs will be central to the system dramatically increases their importance. In essence, global CCPs will be systemically important. Thus, for the system to be safer, 

it is necessary that CCPs be as safe as the United States Bullion Depository. They 

have to have the ability to perform and meet their obligations regardless of the degree of stress in the financial system and even if one or more of their participants 

21

were to fail in a disorderly manner. Hence, there is a compelling need for tougher 

principles that are broadly enforced. 

These derivative reforms involve a significant change in regulation, covering both 

the regulation of firms (legal entities) and the process for entering into and performing individual derivative transactions. 

The U.S. and the EU have been working in parallel over the past 30 months to 

adopt the necessary legislative reforms to achieve these common goals. The U.S. 

adopted the Dodd-Frank Wall Street Reform Consumer Protection Act in July 2010, 

including some 80 pages (Title VII) on derivatives reform. Two months later, in September 2010, the European Commission adopted its legislative proposal to introduce 

similar reforms in the 27 Member states of the European Union. This legislative 

proposal—the European Market Infrastructure Regulation (EMIR)—which runs to 

some 60 pages was adopted by the European Parliament and the Council last July. 

It entered into force last August. As in the U.S., many detailed implementing rules 

need to be in place to specify the technical details of the legislation. In the U.S. the 

CFTC and the SEC are advanced in this process. The EU will adopt its technical 

implementing rules before the end of this year. 

The European Commission has worked closely with the CFTC and the SEC over 

the past years. Staff have held many meetings, sometimes even on a weekly basis, 

to understand and discuss the thrust and details of our respective approaches and 

draft rules. Wherever possible we have attempted, often successfully, to align our 

approaches to avoid discrepancies. The Chairman of the CFTC and European Commissioner, Michel Barnier, have met in Brussels and Washington to discuss derivatives reform on a number of occasions. This has been a very useful process of international cooperation. 

Nevertheless, there remains one key area where we believe further work is required to deliver reforms that will meet our common objectives. Our respective rules 

must also work on a cross-border basis. 

This is important because the $640 TR OTC derivative market is global. The Euro 

or the U.S. dollar are the most important underlying currencies used for OTC derivatives. The global nature of OTC derivatives markets, with the two 

counterparties to transactions frequently located in different jurisdictions to each 

other, or in a different location to the infrastructure being used, makes the effective 

and consistent regulation of cross-border activity crucial. 

We need rules that work not only for regulators and market participants in a national jurisdiction, but also in a cross-border environment and between jurisdictions. 

OTC derivative reforms that are consistent and coherent within a single jurisdiction 

can have adverse impacts when they apply to cross-border transactions. This is so 

even where the different jurisdictions involved have apparently similar rules. Crossborder application of multiple rules will inhibit the execution and risk management 

of cross-border transactions. Recent detailed analysis of U.S. and EU rules has identified numerous potential conflicts, inconsistencies and gaps between our rules that 

should be addressed through mutually acceptable solutions. Failure to address these 

issues will render many of our collective reform efforts to reduce risk in the system 

obsolete. 

By way of example, it is possible that two parties to a transaction may be required to trade in different venues, clear on different CCPs or report to different 

trade repositories. Trades would be subject to mandatory clearing in one jurisdiction 

and to margining requirements in another jurisdiction—this is particularly relevant 

for corporate end-users. 

In order to achieve the effective and consistent implementation of our objectives, 

2 weeks ago international Treasury departments, regulators and central banks 

meeting in the Financial Stability Board insisted on international coordination on 

the cross-border scope of regulations and cooperation on implementation in order to 

avoid unnecessary overlap, conflicting regulations and regulatory arbitrage. 

To be more precise, ‘scope’ is the root cause of many cross-border problems that 

we have identified. We have significant concerns with proposals from the CFTC that 

would extend the territorial reach of its rules to counterparties outside the USA. 

This will create conflicts and undue burdens for market participants. The scope of 

persons who are subject to the application of our respective rules and regulations 

should be defined in the most narrow manner possible and be based on the establishment of the counterparty in the territory of our respective jurisdictions, where 

those jurisdictions have comparable and consistent requirements. What is important 

is that all the counterparties in two jurisdictions be subject to the requirements we 

all agreed to in the G20 to ensure global safety. This is better done by ensuring 

comparability of rules than by over-extending the reach of national rules. What ultimately matters is where the counterparties to a transaction are established, not the 

location where that transaction is concluded. 

22

The principles of ‘recognition’, ‘equivalence’ or ‘substituted compliance’—as referred to in our respective jurisdictions—are important underpinnings of a cross-border regulatory system. ‘Substituted compliance’ will avoid the application of multiple 

rules to the same entity or the same transaction. Appropriate deference to foreign 

regulations is the most effective means of achieving our shared goals. We applaud 

the CFTC for proposing to rely on substituted compliance in the application of its 

OTC derivative rules. We agree that where different requirements achieve the same 

objectives market participants, intermediaries and infrastructures should be subject 

to one set of rules for their cross-border activity. We also believe that the CFTC is 

too modest in the way it proposes to use substituted compliance; it should be applied 

more broadly. We believe that the following key points should be applied by the U.S. 

regulators:

First, regulators should apply substituted compliance between a domestic and 

a third-country counterparty established in a jurisdiction with comparable and 

consistent requirements, and should not seek to restrict this only to transactions between two non-domestic counterparties. The former situation reflects 

the area where the large majority of conflicts and inconsistencies exist between 

our rules. It is therefore necessary to apply one set of rules to such transactions 

to ensure legal certainty for cross-border transactions;

Second, substituted compliance should apply to transaction level requirements 

between counterparties in different jurisdictions, and not only to entity level requirements as U.S. regulators have suggested. Where transaction level requirements are comparable, counterparties should e able to discharge their obligations by complying with one set of requirements. We believe that the CFTC has 

the statutory powers to do this, and has even done this in the past in other 

areas of its rulemaking.

Third, foreign infrastructure which is subject to comparable requirements in its 

own jurisdiction should not be required to comply with domestic requirements 

in order to service the domestic market. Agreement on this is essential to ensuring clearing obligations can be complied with in respect of cross-border transactions.

We also believe that registration should be required only in respect of those jurisdictions that lack comparable and consistent requirements. To the extent that registration is unavoidable, it should be combined, from the very outset, with recognition/substituted compliance in order to limit as far as possible any legal complications and burdens. Market participants must be afforded absolute certainty ahead 

of any registration in respect of the consequences if they apply for registration. 

However, the registration approach suggested by the CFTC has serious shortcomings. Foreign Swap Dealers would be required to register without knowing with 

sufficient certainty the complete set of rules that will bind them as a consequence, 

and how those rules will be applied in an international context—including how substituted compliance will work. A possible waiver or no action letter could provide 

solace. However, this will only delay, but not eliminate the problem. Even if registration only triggers certain trade reporting requirements, lack of substituted compliance could immediately create issues in terms of conflicting requirements. For example, conflicts with data privacy and data protection considerations in national 

and European law may well arise. We cannot put firms in the impossible position 

where they are forced to choose between breaching either U.S. law or EU law. Applying a registration requirement to EU firms without up-front clarity about whether and how substituted compliance will apply will do precisely this. 

Finally, timing is essential. We need the right cross-border rules, and not just 

rapid rules. We would strongly urge U.S. regulators not to enforce rules that will 

obstruct cross-border business before any solutions for cross-border transactions 

have been finalised. 

If we do not reach agreement on a sensible approach to applying our rules on a 

cross-border basis, and entities and particularly transactions are not subject to full 

substituted compliance, then conflicts, inconsistencies and gaps will persist, and we 

believe that trades will not take place, will not be able to be cleared and will, at 

best, be reported in a fragmented manner to repositories. In short, firms in our 

economies will not be able to hedge risks, commercial or financial, and our common 

objectives agreed in the G20 will not be met. 

The European Union is committed to creating an appropriate regulatory framework for OTC derivatives that provides comprehensive oversight, ensures systemic 

stability and promotes market transparency. The EU, like the U.S., is in the final 

stage of implementing the rules to achieve these policy objectives. We are also committed to working with you and other market participants to ensure that our rules 

23

work on a cross-border basis. We look to the U.S. to work with other jurisdictions 

to achieve our common objectives. 

Thank you, Chairman Conaway and Ranking Member Boswell. I appreciate the 

opportunity to testify, and look forward to your questions.

The CHAIRMAN. Thank you, Mr. Pearson. 

We have been joined by the Chairman of the full Committee, and 

I would recognize him for 5 minutes. 

OPENING STATEMENT OF HON. FRANK D. LUCAS, A 

REPRESENTATIVE IN CONGRESS FROM OKLAHOMA 

Mr. LUCAS. Thank you, Mr. Chairman, and I apologize to the 

Chairman and the Ranking Member and our panel here today, lots 

of things going on. At various points recently, I sort of feel like a 

derivatives regulator with all of the stuff swirling around me. That 

said, I appreciate the Chairman holding this timely and important 

hearing to examine the real challenges that are facing both the 

U.S. and international regulators as we attempt to balance the various reforms across the global marketplace. And I hope that we can 

all agree that reforming the OTC derivatives marketplace is a global effort—as has been alluded to by our panelists—that demands 

genuine coordination, not the appearance of coordination. If due 

care is not taken to complement the regulatory structures across 

foreign jurisdictions, we could seriously jeopardize the efficiencies 

currently found in the global market whose nominal value well exceeds $600 trillion—yes, trillion dollars. 

And Ms. Sommers, I want to congratulate you and thank you for 

addressing numerous cross-border issues at the Commission’s Global Markets Advisory Committee on November 7. I share many of 

the concerns echoed at that meeting. And Commissioner Chilton, I 

appreciate you testifying today and look forward to hearing, as we 

have heard, your views. I also want to echo my thanks to Mr. Kono 

and Mr. Pearson for taking time out of their extremely busy schedules to travel literally thousands of miles to testify before the Committee. I think that fact alone should demonstrate that the rest of 

the world is serious about getting derivatives reforms right and the 

United States should reciprocate that level of concern. 

And it is my hope that today’s hearing will continue to foster 

genuine dialogue and actual sincere coordination between the U.S. 

and international regulators. Without proper coordination, American end-users will face higher costs because it will cost more or 

be impossible for some of them to access the global markets to 

manage risk. 

And finally, we must remember the United States was the first 

nation in the world to enact derivatives reform legislation, and as 

the first-mover on reform, we cannot take an approach that is substantially more restrictive than foreign jurisdictions or U.S. institutions will cease to remain competitive around the world. This is a 

result we cannot and must not allow to happen at any cost. 

With that again, I thank the Chairman and the Ranking Member. I yield back and look forward to some fascinating questions. 

The CHAIRMAN. I thank the Chairman. 

The chair would remind Members that they will be recognized for 

questioning in the order of seniority for the Members who are here 

at the start of the hearing. After that, Members will be recognized 

24

in the order of arrival. And I appreciate the Members’ understanding. 

I now recognize myself for 5 minutes. 

Again, thank you for coming this morning. 

As we talk about trying to harmonize across international borders, I am very troubled by the fact that the SEC and the CFTC 

can’t issue a common U.S. persons definition. It is my understanding that you can have the circumstance where you would be 

a U.S. person for swap dealer standpoint and a non-U.S. person for 

a securities swap. It makes no sense. Is there some law that prevents the CFTC from issuing a joint rule or joint guidance that 

would at least harmonize on our side of the various oceans? Either 

one, Ms. Sommers or Mr. Chilton. 

Ms. SOMMERS. I don’t think there is anything certainly that prevents us, and I want to stress that we have been coordinating with 

the SEC all along. There are just fundamental differences in both 

Commissions’ approach to the cross-border issues. 

The CHAIRMAN. But do those fundamental differences mean we 

will in fact have two separate definitions that the world will have 

to deal with——

Ms. SOMMERS. Right. That is right. 

The CHAIRMAN. There is no common ground that you can come 

to? 

Ms. SOMMERS. There is common ground and I believe that the 

staff is still working to come to a common agreement on those 

issues, but right now, we are not there. 

The CHAIRMAN. Yesterday, Chairman Gensler told the Financial 

Services Committee to expect to have some additional rules by the 

end of the year. I am not sure how the Commission works, if the 

Chairman has unilateral authority and each Commissioner does as 

well, but are you aware of these pending changes or things that 

will be done at the end of the year? And will that include a narrowing of the definition of U.S. persons?

Mr. CHILTON. I am not sure about the narrowing, Mr. Chairman, 

but the process is a little different than just a regular rule that we 

do as part of Dodd-Frank. This is the final exemptive order that 

we have been sort of talking about, moving things out for some 

time certain. But it could be narrowed and that is what I called for 

here in my testimony—ensuring that if you are a U.S. affiliate in 

a foreign country—so you are U.S. bank XYZ but you are in another country—that you wouldn’t have to be required for this time 

period certain—6 months, 5 months—to register, nor would anybody doing any business with you. A foreign swap dealer, for example, would have to register. So I am hopeful we can narrow this 

down as you suggest. 

And one thing if I might, Mr. Chairman, is that one of the problems that we have had this—and I take Congressman Scott’s 

point—a lot of times this has not been graceful what we have done 

by any stretch of the imagination. It has been a little messy. But 

we have tried to accommodate things as we have gone forward. We 

had some compliance deadlines on October 12 and it was sort of a 

mess leading up to that. We have all these questions, a couple hundred questions, letters from people. We finally got it dealt with but 

it was not pretty. So I am hopeful that we don’t end up in that cirVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00028 Fmt 6633 Sfmt 6601 I:\DOCS\112-35\77833.TXT BRIAN
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cumstance this year, Mr. Chairman, at the end of this year. And 

certainly, if we haven’t given an answer to somebody when they 

have requested guidance, I cannot imagine and I would not be supportive of the agency taking any action against such a firm. 

The CHAIRMAN. The mechanics of a 6 month extension is a blanket extension or each individual entity has to request the extension? What are you contemplating? 

Mr. CHILTON. The Commission could do it and we could do it 

blanket, and what I am suggesting is a 6 month window on compliance so nobody would have to comply for 5, 6 months, whatever the 

time period would be. 

The CHAIRMAN. My professional background as a CPA, we have 

a similar issue with respect to 54 jurisdictions in the United 

States, all of them wanting to regulate CPAs differently. The regulatory agencies, all 54 of them and the CPAs, came together and 

created a Uniform Accountancy Act, which was the standard by 

which everything would be judged. And if your state laws met the 

standards of the UAA, then your CPAs could practice wherever 

they wanted to. Is the International Organisation of Securities 

Commissions, Mr. Kono, an appropriate body to create that standard, a uniform Act, on which all the jurisdictions could look to 

when they are putting theirs together so that they would have this 

substituted equivalency—or we called it substantial equivalency in 

the accountancy world—to alleviate some of these cross-border 

things? Is that the organization to do that? 

Mr. KONO. Thank you, Mr. Chairman. 

First, I should mention that IOSCO has certainly been effective 

in developing standards in certain areas, and particularly, those 

standards pertain to, for example, the rules that countries should 

apply or are recommended to apply with respect to mandatory central clearing, to data reporting, to other aspects of OTC derivatives 

reform. 

Having said that, those are standards that will have to be implemented by national governments and supervisors, each within their 

powers and within their mandates. And therefore, when it comes 

to coordination across different implementation schedules, different 

rules being implemented in countries, this coordination will have 

to take place amongst the regulators and supervisors. And IOSCO 

could certainly facilitate that process, but IOSCO is not necessarily 

a place where we can take decisions that will be enforceable upon 

governments. I think we have——

The CHAIRMAN. Okay. Yes, I understand that you can’t do it on 

their behalf, but if they had to go by documents that put their rules 

in place that comported with those, then they would meet the 

equivalent standards that would allow for the recognition of their 

regulatory scheme by the U.S. 

Thank you. 

Mr. Scott for 5 minutes. 

Mr. DAVID SCOTT of Georgia. Thank you very much. 

Let me start with Mr. Chilton and Ms. Sommers. Again, welcome. But before I do that, let me ask unanimous consent that we 

submit this statement for the record from the Americans for Financial Reform. 

The CHAIRMAN. Without objection. 

26

[The information referred to is located on p. 77.] 

Mr. DAVID SCOTT of Georgia. Thank you, sir. 

As you know, Commissioner, the temporary relief that you all approved on October 12 will expire on December 31, and that threatens a repeat of the business losses we saw in October. Will the 

CFTC act well in advance of this date to provide certainty and clarity for market participants and customers? It certainly seems that 

something definitely needs to be done. The date December 31 is 

rapidly approaching; it is about 2 weeks away. 

Ms. SOMMERS. Unfortunately, as you know, we are already at 

December 13. I think it is both my hope and Commissioner 

Chilton’s hope that we have something that is clear and that clarifies all of these issues for market participants within the next 

week. 

Mr. DAVID SCOTT of Georgia. All right. And Commissioner 

Chilton, earlier this year, you gave a speech where you provided an 

estimated timeline for the implementation of Dodd-Frank rules, 

and you suggested that cross-border guidance be finalized by June 

2013. But is this when you expect the CFTC to vote on the measure? 

Mr. CHILTON. I would hope that we could do it now, like ASAP, 

Congressman, and then have the compliance delayed until June 1 

or perhaps July, whatever make sense. I am not a stickler on 

whether or not it is a month or so. As I said, I am not sure that 

that makes everything super graceful, but it will help. When I talk 

with the financial firms, part of the concern is that it is disjointed. 

It is like Chairman Conaway was saying, people are going at different rates and speeds, and so if we do it at the same time when 

there is sort of a date certain, that will help at least. 

Mr. DAVID SCOTT of Georgia. All right. Mr. Kono, let me ask you. 

During the SEC’s Global Market Advisory Committee meeting on 

November 7, you stated that some firms outside the United States 

have started to decline transactions with the United States companies because of the uncertainties in the rules and the apparent lack 

of coordination between regulators. And indeed, I think this is 

what we saw in October. But in your current observations, have 

U.S. regulators taken sufficient action to clarify this uncertainty? 

Mr. KONO. Thank you very much for your question. I think that 

since then, we have been doing our utmost efforts in actually providing more clarity to our market participants, and of course initially, there was this reaction of wait-and-see. But now, I can testify that Japanese financial service providers are able and willing 

to conduct normal business with their U.S. counterparts once, of 

course, the rules become a clear and they are made known to them. 

I think there is still some work to be done in that respect so the 

uncertainty is being removed, but we still have some more work to 

do. 

Mr. DAVID SCOTT of Georgia. Thank you very much. 

Mr. Pearson, I found your testimony to be very revealing and 

very consequential. I think it would be important to get a reaction 

from your recommendations from Ms. Sommers and Mr. Chilton in 

your efforts on this whole issue of cross-border extraterritorial. You 

stated your recommendations and major concerns were scope, registration, and timing, and you sort of laid the gauntlet down to 

27

challenge our regulators. And so Mr. Chilton and Ms. Sommers, 

how do you react to what he said and do you accept the challenge 

and the recommendations that he has offered? Or do you find any 

problems with adhering to those? 

Ms. SOMMERS. Congressman, I think that the difficulty for us 

right now in working with our global counterparts, as I alluded to 

in my testimony, is not just substance. There are issues with regard to substance that we continue to work on, but because the 

United States is requiring compliance with the Dodd-Frank rules 

that we have already finalized, it adds an enormous amount of 

challenges to firms who are trying to operate. Without knowing 

how we are going to apply Dodd-Frank extraterritorially, asking 

people to comply is where the problem is. So we are hopefully going 

to be able to issue some type of relief to both foreign and domestic 

swap dealers within the next week, and I think that is where the 

agreement that at least I have and I believe Commissioner Chilton 

has with Mr. Pearson’s testimony. We do believe that that relief 

needs to happen for compliance while we are working out all of 

these details before we can all come to the same place and coordinate on all these rules. 

Mr. DAVID SCOTT of Georgia. Thank you very much. 

The CHAIRMAN. I thank the gentleman. 

I ask the Committee’s indulgence to recognize the Chairman of 

the full Committee for 5 minutes. 

Mr. LUCAS. And I appreciate the Chairman and the Committee’s 

indulgence. 

Commissioner Sommers, on or before October 12, the CFTC 

issued a number of staff no-action letters and interpretations to address many of the outstanding concerns and uncertainties surrounding implementation of its new derivative rules. Are the four 

other Commissioners outside of the Chairman’s office consulted by 

CFTC staff on no-action relief letters or exemptive orders prior to 

their release? 

Ms. SOMMERS. Well, I think this process has been overwhelming 

for all of us. The answer would be sometimes we are and sometimes we are not. Certainly, before October 12, there were dozens 

of no-action letters that we issued and we are in the same place 

now before the end of the year because these compliance statutes 

are kicking in. We have had dozens of requests for additional 

pieces of no-action relief. These are issued by staff. The no-action 

letter is saying that staff has agreed to not take enforcement action 

against these entities for not complying with issues. Sometimes the 

Commission is aware of those requests and sometimes we are not. 

Mr. LUCAS. But in the aftermath, the Commissioners all see 

these documents? 

Ms. SOMMERS. We do see the no-action letters, yes. 

Mr. LUCAS. Yesterday, at the House Financial Services Committee meeting, Chairman Gensler was asked about the cost-benefit analysis performed by the Commission on cross-border guidance, and he asserted that it had in fact been done. Are you aware 

of any such analysis? 

Ms. SOMMERS. There is a cost-benefit analysis within a proposed 

exemptive order that is circulating within the Commission right 

now. There is a cost-benefit analysis within that document. 

28

Mr. LUCAS. Well, let me ask this question then. The Chairman 

asserted that he had approximately 40 different cost-benefit analyses on different rules. How many of those analyses have been 

shared with you, or Mr. Chilton for that matter? 

Ms. SOMMERS. Typically, they are included within the drafts of 

the rules. There is a cost-benefit analysis included. It differs certainly with regard to how thorough those analyses are. 

Mr. LUCAS. Mr. Kono, what do you say to reports that foreign 

firms stopped doing business with U.S. firms for fear of being 

swept up in the U.S. regulatory regime? 

Mr. KONO. Thank you very much. I think it is fair to say that 

insofar as the Japanese financial service providers are concerned, 

they are willing to comply with U.S. rules once they are, of course, 

made transparent and also that they are given enough time to comply. And I don’t think that anything would lead us to think that 

all of the requirements will be too onerous for foreign providers to 

comply with; it is just that we need more transparency. 

Mr. LUCAS. But it is fair to say that foreign firms are concerned 

about how this process will evolve? 

Mr. KONO. They are reasonably concerned, but at the same time, 

they do register recent progress and I mention that. Thank you. 

Mr. LUCAS. Mr. Pearson, what are some of the potential consequences that would result from conflicting swap dealer regulatory regimes if you would expand on your testimony of course? 

Mr. PEARSON. Congressman, the results and consequences that 

we have been able to analyze is that depending on the conflicts between the rules and requirements of the United States and the 27 

countries of Europe, trades will not be able to be cleared. If they 

can’t be cleared, they won’t take place. This means that firms, endusers will not hedge their risks; or firms will hedge their risks but 

they will only take place within one jurisdiction, which means that 

risk will be concentrated in one jurisdiction on the planet. That 

could be the United States. If your firms can’t hedge their risks 

outside of the United States, they will have to hedge them here. 

The consequences of that is obviously a fragmented market and a 

significant concentration of financial risk in the U.S. system. And 

this is exactly what we tried to prevent with our global regulatory 

reform. 

Another consequence is that perhaps firms that will be able to 

conclude a contract but it is not clear which rules apply to that contract. If it is not clear which rules apply to the contract, you run 

obviously legal risk. Which rules do you apply; which rules do you 

not apply? 

A third consequence is that a contract might be able to be concluded, but the contract is reported for regulatory purposes to different jurisdictions and different swap data repositories. This 

means that the regulators and the governments will not have that 

overview of this important and significant market that we wanted 

to have. A global overview aware of the risks, who is bearing the 

risks, which financial firms in our economies are exposed to those 

risks? So that means that none of the objectives we tried to agree 

on in the G20 will be met. 

29

Mr. LUCAS. Thank you, Mr. Pearson. And I appreciate the indulgence of the Chairman and the Ranking Member and yield back 

the time I do not have. 

The CHAIRMAN. Thank you, Mr. Chairman. 

The chair recognizes Mr. Courtney for 5 minutes. 

Mr. COURTNEY. Thank you, Mr. Chairman. And I really again appreciate the fact that you have organized this hearing on DoddFrank implementation, which unfortunately Congress hasn’t been 

around much the last couple months and a lot of things have been 

happening. And I apologize to some of our guests here from outside 

because I did want to focus on another issue which you have been 

grappling with. 

Again, I think the last time the two Commissioners appeared be- fore this Committee, gas prices were about $4.25, $4.30 up in New 

England. Today, they are about $3.50, $3.40. I think Rhode Island 

is $3.30. Obviously that is a pretty dramatic drop, about 20 percent. End-users that I talk to, whether it is farmers, oil delivery 

guys, the cynicism with which they regard this market that is seeing this type of swing—I realize refineries were offline and now are 

back online. I mean there are some things that actually happened 

in the real world that might explain some of it, but the fact is is 

that nobody really believes that that drastic a drop can be explained by real market factors. 

And Dodd-Frank had a specific provision, and Commissioner 

Sommers, the language from Congress, which you eloquently 

talked about in your remarks, could not have been more crystal 

clear about the dictate to the Commission to put some position limits in almost a year ago. And obviously the court decision was a big 

disappointment that came down. Again, I would appreciate it, Commissioner Chilton, if you could give us an update in terms of where 

we stand regarding the legal case and where the Commission 

stands in terms of trying to address this. 

Mr. CHILTON. Thank you for the question and thank you for your 

leadership, Congressman, on that particular issue, speculative position limits. The agency has appealed the district court’s decision, 

yet staff is currently working—and we haven’t seen a draft yet—

on yet another rule. It is a little bit in the weeds. I will try to make 

it sort of high level. The court said that we have two authorities. 

We have the Dodd-Frank authority to establish speculative position 

limits, which we used. The court just said we should have explained why we needed to use that. And the law was pretty clear 

to me. I mean it said the agency shall establish appropriate position limits. But the case went to the word appropriate. What is appropriate? The court said, well, you should say why you are doing 

it, what is appropriate. 

The second authority that the judge said that we have, which we 

know we have, is a 1936 authority, and so I believe that the rule 

that we propose, yet another rule—so the appeal is going along at 

one rate and then the other rule that I hope we will approve sometime in the first quarter of the year—we will use both the 1936 authority and the Dodd-Frank authority. It will have the added benefit, this rule I hope, of doing an improved cost-benefit analysis, 

which was one of the other challenges in court. When we did the 

cost-benefit analysis, we did it based upon the information we had 

30

from market participants, but it wasn’t very detailed because they 

didn’t know. Now, because all of this was supposed to happen October 12, they know how much it costs them, so I am hopeful that 

our rule will also include a better, more improved cost-benefit analysis. 

Mr. COURTNEY. Well, thank you. And I would just say this, 

again, with two Commissioners here. You know, for people who we 

go home and try and explain what is going on in Washington to 

deal with this issue, which again just goes to the heart of our economic recovery. Whether it is a nurse going to work in the morning 

who is dealing with high gas prices or a small business who is trying to stay ahead of this, the inability of us to even explain what 

the heck is going on and what is being done about it, again it just 

puts everyone in an impossible position. And frankly, the fact that 

the Commission appears to be divided in terms of even a decision 

of whether to file an appeal is very disappointing because just at 

some point what we are talking about here is not about sort of your 

job; it is about people’s jobs every single day out there in the real 

economy. And they are counting on you to do something. 

And again, this is one of my last appearances in this Committee 

because I am going to be moving on in the next Congress, and I 

just, again, appreciate the Chairman’s focus on this issue because 

it really does go to the heart of whether or not we are going to have 

a real recovery. And what you do, which is not that well understood out there in the public, is just critical. So please, when you 

are looking at these issues—Dodd-Frank didn’t happen because 

people just wanted to create some regulatory structure. There was 

a real need in terms of what happened in 2008 and it is still going 

on today. 

I yield back. 

The CHAIRMAN. The gentleman yields. 

The gentleman from Iowa, Mr. King, 5 minutes. 

Mr. KING. Thank you, Mr. Chairman. And I thank the witnesses 

for their testimony, especially those that came the furthest to provide that input to us today. 

I would first turn to Ms. Sommers. And I noted in your testimony that you referenced Section 722(d) and I believe that you said 

that the Act shall not apply to activities outside the United States 

unless those activities have a direct and significant connection. And 

you referenced that it needs both. And it is the implication that—

and I don’t know if I heard it clearly—you believe the rules that 

are being written today are reading that as direct or significant or 

how would you describe that to me? 

Ms. SOMMERS. Congressman, the CFTC put out a proposal for interpretive guidance on cross-border issues in June of this year, and 

that proposal suggested that if a swap had a direct connection to 

the United States, it should be regulated under Dodd-Frank. So the 

significant part of that definition in my opinion was not considered 

appropriately. 

Mr. KING. They interpreted the word significant to be insignificant, then, in other words? 

Ms. SOMMERS. Yes. 

Mr. KING. Thank you. And Mr. Chilton, I listened to your testimony in your recommendation that we not require compliance for 

31

6 months but it does say they finalize the rule as soon as possible. 

That is generally how I hear it. And so if that is the case, can you 

tell me how close we are going to be in conformity with foreign regulators? Do we have a sense of that at this point? I know you said 

we are within 6 months, but I don’t know how far apart the regulations might be. 

Mr. CHILTON. On the issues, sir, yes. We are closer than some 

might think. I mean there are still some differences and I am hopeful that also during that transition period that they actually get 

closer. Now, when I say that, we will have pretty much done most 

of ours but we still will have things that we call interpretive guidance and we do Q&A’s for people, and we will still work with foreign regulators. I stated earlier that everything we have done 

hasn’t necessarily been graceful—but we have shown that we can 

sort of turn around and when we make a mistake, we certainly 

hear about it. You guys hear about it, and then we hear about it 

from you all. So if we make a mistake, we can fix it. I am committed to doing that, but so far I think that this delay that we have 

had, Congressman, has actually led us to a place that is much better. I thank you for the guidance to go slow at times. I think you 

guys were right. And to me, where we are now is much better a 

place than I thought we would have anticipated even 6 months ago. 

We still have a ways to go. 

Mr. KING. Who needs to move more, foreign regulators or us as 

regulators? 

Mr. CHILTON. Well, I think we have struck a pretty good balance, 

Congressman, and so I am not so sure that we need to move much. 

Now, on the compliance we definitely need to do that. And I think 

Commissioner Sommers and I are in lockstep on that. But I am 

pretty confident with where we are on the rules right now. 

Mr. KING. And you heard Mr. Kono testify that he believes that 

we can rely on foreign regulators and you are comfortable with that 

testimony? 

Mr. CHILTON. I am, particularly on the major things, the major 

reasons why Dodd-Frank was created, to avoid systemic risk, I 

mean, so that we don’t have another $400 billion bailout. So if 

there is some big fish trader in London with a U.S. bank but he 

is in London and that can come back to haunt us and maybe our 

taxpayers with the bailout, we either have to ensure that the UK 

or the EU is regulating them or we have to do it. If they don’t have 

a comparable regulatory regime, we need to protect our taxpayers 

by doing it. 

Mr. KING. Okay, that is if there is a gap. But I will turn to Mr. 

Pearson and I recall your testimony, Mr. Pearson, that you said 

sometimes you have to decide which rules to break. What kind of 

input would you like to provide on the testimony you have heard 

since you spoke? 

Mr. PEARSON. Thank you for the question. I think the knife cuts 

two ways. It is not really the question whether UK regulators expose U.S. taxpayers; we have faced exactly the same issue when 

European taxpayers were exposed to U.S. regulatory shortcomings—MF Global, AIG, Bernie Madoff. These are not European 

companies. So we are all in the same ship here. I think the point 

we are trying to make is that we have the same objectives. If we 

32

have the same rules and requirements, then we should be able to 

rely on the same rules and requirements. Where we don’t want to 

be is to have the same rules and requirements which are slightly 

different to apply to the same actors and to the same contracts. 

That is an unworkable situation. The contracts simply will not take 

place and everybody will lose. Citizens will lose, companies will 

lose—they can’t hedge their risks—firms will lose because firms 

will arbitrate and will shift and rebook their trades to other jurisdictions. Nobody wins. And that is where we need to focus our attention on. 

Mr. KING. Thank you, Mr. Pearson. And I do think the word significant is significant. 

And I yield back, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. 

And the lady from Alabama, Ms. Sewell, is recognized for 5 minutes. 

Ms. SEWELL. Thank you, Mr. Chairman. I want to again thank 

Chairman Conaway as well as Ranking Member Boswell for scheduling this hearing today. You know, this hearing has really given 

us a chance once again to hear from witnesses and to discuss DoddFrank derivatives reform and some of the challenges that we are 

facing both in the United States and internationally. The 2008 financial crisis made it clear that regulators must have transparency 

in the global derivatives market in order to make educated policy 

decisions and to mitigate systemic risks. 

As we continue to move forward with the rulemaking in the implementation process provisions of Dodd-Frank, I think we need to 

be really mindful of the original intent and the original purpose behind the passage of this essential reform. Dodd-Frank was intended to add more transparency and oversight to the financial 

markets and to ensure that another financial crisis, a meltdown if 

you will, doesn’t happen again. 

This is why I stood with a bipartisan group of Congress Members 

to introduce H.R. 4235, which is the Swap Data Repository and 

Clearinghouse Indemnification Correction Act of 2012. It was to 

help ensure regulators continue to have that transparency in the 

derivatives market needed to make those crucial decisions as to 

how to mitigate their risk. And it is my hope that this bill will 

come to the Floor in the very near future and be considered and 

passed by the entire body. 

I want to applaud the diligent work that both the CFTC, as well 

as the SEC, has had in both drafting and implementing these critical new regulations. I know it is hard. I appreciate all that you 

all do to take into account all the various parties that are involved 

in trying to make sure that we have cogent and workable regulations. However, as Members of Congress, we must continue to provide importance guidance and oversight to both the agencies to ensure that there are no unintended consequences to the original purpose and intent of Dodd-Frank. 

Additionally, many market participants, along with their regulators, continue to voice concerns over the very lack of rules and 

sufficient time to implement them. So this Subcommittee’s hearing 

today is critically important. 

33

I am a former lawyer. I worked on Wall Street for the first part 

of my career at Davis Polk & Wardwell and did securities law. I 

think that the indemnification issue is an important one. And given 

all the significant extraterritorial issues, my question really is to 

either one of the Commissioners. The CFTC, is it ever going to 

really support striking the indemnification requirement and promote a passage of H.R. 4235? 

Ms. SOMMERS. Thank you, Congresswoman. I have supported 

that legislation publicly in the past, and I do think that the only 

way to really solve the problems with regard to those issues is a 

legislative fix. We have done everything we can in our rule to address the issue as far as our rulemaking ability, but I do think it 

needs a legislative fix. 

Mr. CHILTON. Yes, I agree, Congresswoman. Thank you for your 

leadership on the issue. 

Ms. SEWELL. There have been considerable debates around the 

intent of the Section 722 of the Dodd-Frank and the aggressive approach being taken by the CFTC to apply derivatives rules to the 

U.S. banks doing business overseas with foreign clients. I am concerned that the CFTC’s application of section 722 and its expansive 

view of what is direct and significant connections with activities in 

and effect on commerce in the United States, what that means. 

And the proposed cross-border guidance misses the mark in many 

ways in really explaining and ameliorating that problem with the 

CFTC moving ahead to apply the Dodd-Frank rules abroad without 

real clear harmonization. And many international regulators are 

quite concerned about the conflicting laws for those entities. And 

I really wanted to ask you whether you thought that it would lead 

to greater conflict if not resolved, specifically Section 722? 

Mr. CHILTON. Thanks, Congresswoman. 

I think the issue really comes down to, ideally, what we would 

all like, is to allow for comparable regulation by foreign regulators, 

but we have no desire to have little CFTC deputy agents running 

around Brussels. It is just a matter of everybody coming together, 

which is why this timing delay is so critical so that we are all doing 

it sort of together. 

There can be some sort of disagreement about what is significant. The Dodd-Frank Act was trying to get at the big things that 

were systemic risks that can bring down our economy, so I am 

hopeful that ultimately everybody will have their own regulations 

on the big things like systemic risk, capital, margin, those things, 

transparency like swaps data repositories. Those things, they need 

to be pretty close on the language—not identical but pretty close. 

And then there is a whole list of other things where they don’t necessarily have to be so close. But on the key fundamental things, the 

things that impacted the entire global economy, those have to be 

fairly close together, at least that is my view. 

Ms. SEWELL. Thank you. Thank you all for your participation in 

the hearing. 

The CHAIRMAN. Mr. Scott for 5 minutes. 

Mr. AUSTIN SCOTT of Georgia. Thank you, Mr. Chairman. 

And I, like you, come from one of those highly regulated industries, and Mr. Chilton, I can’t help but laugh when you say if the 

34

regulators make a mistake, they will fix it. And I wonder is being 

one of the regulators, at what cost to the regulated does that come? 

But we are here today because this has an important impact on 

global trade. And 80 percent of the world trade is outside of the 

United States. Our trade partners, our global trade partners in 

general are also our allies when it comes to, in many cases, more 

difficult issues, and we need to make sure that this is implemented 

in a manner that doesn’t hinder commerce. 

I listened as Mr. Pearson talked about scope, registration, timing, and other challenges that still remain with regard to the rules. 

And I have listened to you, Mr. Chilton, say that we need to have 

these timing delays so that we are able to get on some of the same 

page if you will. Is that correct? Yet you contradict yourself when 

you say we are going to go ahead and pass our rule in the United 

States—this month as I understand it—but we are going to delay 

the implementation for 6 months essentially to give the rest of the 

world 6 months to come in compliance with the U.S. 

Mr. CHILTON. Well, there may be a little minuti# there that will 

save my potential contradiction, and that is we put out a proposal, 

Congressman. I believe it is fairly well done. It strikes a fairly good 

balance. But we do have an interpretive guidance and it does allow 

us to continue this dialogue, which Commissioner Sommers has 

been engaged in through the GMAC and the Chairman has been 

engaged in, so it doesn’t mean that we can’t move. It doesn’t mean 

that this is it and there is nothing else that can be done. But look, 

in fairness, we were first. We have had some time to do this and 

the EU has been sort of playing catch-up and they have done a remarkable job. But we have a proposal out there and I hope people 

will continue to look at it and ultimately we will have comparable 

regulations across the globe. 

Mr. AUSTIN SCOTT of Georgia. Mr. Chilton, with due respect, 

once it becomes a rule, it is no longer a proposal. It is no longer 

a proposal once you adopt it in December. Now, compliance with 

it, you can delay compliance for 6 months, but the bottom line is 

once you adopt that rule, firms must start to come into compliance 

with your rule, because when you turn on the compliance of it, they 

don’t get 6 months from the date you turn it on; they get 6 months 

from the date you implement it to the date you turn it on. And if 

they are out of compliance on day two, then they are in trouble. 

And if you have made a mistake, you said you can fix it, but with 

all due respect, it will come at a tremendous cost to the people who 

are regulated and maybe to the U.S. economy because we——

Mr. CHILTON. Yes, I hope I am not talking past you, Congressman——

Mr. AUSTIN SCOTT of Georgia. You are not talking past me, I can 

assure you. 

Mr. CHILTON. Okay. I didn’t mean it as an insult. I meant that 

maybe I am not expressing myself correctly. So we have interpretive guidance. We are doing that all the time. I mean we are doing 

it on rules that were done a year ago. We continue to do that. And 

so my only point is not that the rule is not the rule when it is done, 

but there are things that can be done after the process and sometimes they will actually require amending a rule. A lot of times 

they can do it on a staff level. That was my only point, sir. 

35

Mr. AUSTIN SCOTT of Georgia. Mr. Chilton, it is better to get it 

right the first time. 

And Mr. Pearson, if I understand you, we still have scope, registration, timing, other things that are still to be discussed. And 

Mr. Kono, do you agree that those three things have not been resolved? 

Mr. KONO. Thank you for your question. I think we are still very 

much in the process of addressing those issues. And in fact, I did 

talk about reliance on foreign regulators on this point. Of course, 

we are quite aware that we need to build an element of mutual 

trust before this can be done, particularly since we do understand 

the concerns that you have of those risks flowing back to the U.S. 

from abroad. On the other hand, to build this trust, we are determined to move forward and we would like to have some time for 

it. 

Mr. AUSTIN SCOTT of Georgia. Yes, sir. And that is in the best 

interest of global trade is to give you that time. And my concern 

with the CFTC is they are going to do what they want to do regardless of whether this Committee says no or our trade partners, 

which are also our allies in military affairs, think that that is bad 

for global commerce. 

And I guess I would ask one last question, Mr. Pearson. Would 

it make sense—and it may or may not; just think out of the box—

that a trade that was placed in Euros that the European Union be 

the primary regulator of that trade since it was placed in Euros? 

In other words, should the currency that the trade is placed in 

matter with regard to who regulates it? 

Mr. PEARSON. Thank you. The currency is a key issue but there 

are other leading points as well, and that is where are the 

counterparties established? U.S. counterparties between themselves can have Euro-denominated trades. 

Mr. AUSTIN SCOTT of Georgia. Sure. 

Mr. PEARSON. It would be out of the question—out of the question—for that very reason only that the European Union would 

seek to regulate that contract. And the problem is, well, that is exactly what the CFTC attempts to do with its June cross-border 

guidance. We do not believe that it is the right thing to do the moment that one U.S. party is a counterparty to a trade, then U.S. 

rules apply. It makes no sense and it is not in line with international comity, as Mr. Kono has said. 

Mr. AUSTIN SCOTT of Georgia. Thank you, sir. 

Mr. Chairman, I yield the time that I don’t have. 

The CHAIRMAN. I thank the gentleman. 

Mr. McGovern for 5 minutes. 

Mr. MCGOVERN. Thank you, Mr. Chairman. I apologize for being 

late. 

I have a question, Ms. Sommers. I know it is a bit off-topic but 

it has been awhile since you were here to talk about MF Global 

and your investigation. When you testified here more than a year 

ago, you said in response to a question by my colleague Mr. 

Cardoza, ‘‘there will be policy changes that we will want to come 

to this Committee for your consideration.’’ You also told Mr. 

Cuellar and Mr. Gibson that you would get back to the Committee 

with a comprehensive list of lessons learned from MF Global. Can 

36

we expect any policy changes or lessons learned from you before 

the end of this year? 

Ms. SOMMERS. Congressman, thank you for that question. My 

delegation with regard to MF Global is solely with regard to the 

enforcement investigation. Chairman Gensler has taken a lead on 

the lessons learned from MF Global. We did issue earlier this year 

a package of rule changes to our own internal CFTC rules that had 

to do with customer protection, and many of those were part of the 

package of lessons learned from MF Global and were directly related to the incident that happened through MF Global. So I do 

think that the Commission has moved forward on that, but as far 

as lessons learned being submitted to the Committee, I am not sure 

if the Chairman intends to do that. 

Mr. MCGOVERN. So is the enforcement investigation concluded? 

Ms. SOMMERS. No, sir, it is not. 

Mr. MCGOVERN. And do you think it will be concluded before the 

end of 2013 or——

Ms. SOMMERS. There is no way for me to speculate on when the 

enforcement investigation will end. I can assure you that we are 

working diligently on that investigation. 

Mr. MCGOVERN. A few weeks ago our colleagues on the Financial 

Services Subcommittee on Oversight issued a report on MF Global. 

Ms. SOMMERS. Yes. 

Mr. MCGOVERN. Do you have any comments or thoughts on that 

report, and do you think its characterization of the CFTC’s performance during the MF Global crisis is accurate or fair? 

Ms. SOMMERS. I certainly do. It did reflect many of the important 

issues that we all, in hindsight, realized after MF Global happened. 

Mr. MCGOVERN. Thank you, Mr. Chairman. I don’t have any further questions. 

Mr. CRAWFORD [presiding.] The gentleman yields back. 

I am going to recognize myself for 5 minutes. 

Mr. Pearson, yesterday, at House Financial Services, Chairman 

Gensler stated, ‘‘We are comfortable with substituted compliance if 

there are real rules over there.’’ We seem to be speaking specifically about Europe, Japan, Australia, and Canada. And that is interesting for a couple of reasons. One, his words call into question 

his repeated assurances that he has given the U.S. Congress that 

he is coordinating abroad; and second, it raises the logical question 

of what are the standards by which the CFTC and Chairman 

Gensler will judge as a real rule? Your thoughts? 

Mr. PEARSON. Thank you for the question. We went through the 

process of comparing 500 pages of Dodd-Frank and CFTC draft implementing rules with 642 pages of European rules. We have real 

rules, both jurisdictions, and we have worked closely with Chairman Gensler and the staff on this. The rules are there. The question is also are they comparable? In many cases they are. In many 

cases U.S. rules and European rules are comparable; in a lot of 

cases European rules are tougher than American rules. Example: 

DCOs or CCPs. This is where the risk will be concentrated on OTC 

derivatives, the handful of them on the planet: $640 trillion of risk 

will be concentrated in five entities. We believe that they have to 

be able to stand financial Armageddon. They need to be stronger 

than the U.S. bullion depository, Fort Knox. 

37

The European rules are tougher, stricter than the U.S. CFTC 

rules on these CCPs, DCOs. Does that mean they are incomparable? No. It means we are following the same objective. We 

have differences in rules. We need to make sure that these rules 

work together. We need to make sure that U.S. firms, U.S. companies, U.S. financial firms can clear their trades in U.S. or in European DCOs, even if, as Mr. Chilton says, the rules are not identical, even if we go a bit further than the United States of America. 

We have been working on this. The question is not what do the 

rules say? The question is are we willing to defer to each other’s 

rules? And as I said before, Congressman, we believe the CFTC 

needs to defer more in the field of transaction requirements than 

they are prepared to do at this point in time. Otherwise, the system simply will not work. 

Mr. CRAWFORD Okay. Let me follow up on that. You recently 

talked about the inconsistencies between European rules and the 

CFTC approach. You stated that ‘‘trying to regulate the cross-border rules verges almost on rocket science’’ and I can tell you this 

is a potential Apollo 13 situation. The message is, ‘‘Washington, we 

have a problem.’’ Do still think that Washington, or maybe better 

stated, the CFTC has a problem, and what would the major issues 

be that are unresolved? 

Mr. PEARSON. Thank you. Absolutely. When I refer to Washington, I refer to Apollo 13. My knowledge of Hollywood films is not 

as extensive as those of Mr. Chilton. I will quote the Roman historians or Shakespeare, but that is where it stops. 

Yes, we do believe we have a problem. We tried to resolve that 

problem as Mr. Kono made clear. Two weeks to the day we had a 

meeting in New York with international regulators. The problem is 

absolutely clear. There is no issue on the table that nobody understands. The question is to what extent are we prepared to accept 

that our rules are the same and to what extent are we prepared 

to defer to the rules of another jurisdiction where we have the 

same or similar rules and the same objectives? That is the problem. 

And the question is simply scope. Are we prepared to limit the 

scope of the extraterritorial application of our rules and requirements? In Europe we are. 

In Europe we have a rule on the table that our parliament, our 

Congress has accepted. As it is said, we are prepared to defer European rules entirely and apply Dodd-Frank entirely in European 

Union if it works both ways. We need the CFTC to understand that 

we need, too, to go down that route. We cannot do it on our own. 

And that is where we need further work and further discussions, 

Congressmen. 

Mr. CRAWFORD Thank you, Mr. Pearson. I am going to yield the 

balance of my time and recognize the gentleman from California, 

Mr. Garamendi, for 5 minutes. 

Mr. GARAMENDI. Thank you. And since this is my first day in a 

Committee hearing on the Agriculture Committee, I will try to 

quickly catch up. And so if I cover some areas that have already 

been covered, my apologies to all. 

I am trying to understand the territorial thing. It seems to me 

it can be worked out and is likely to get worked out here in the 

very near future. It is certainly in all of our interests to do so. 

38

Mr. Chilton, in your testimony, you blew past an issue that I 

know that you are concerned about and that is high-frequency 

trading. Is there any information available today that high-frequency trading causes disruptions or inappropriate directions in 

the marketplace? 

Mr. CHILTON. Thank you for the question and I look forward to 

working with you, Congressman, on the Committee. 

The CFTC recently put out a report last week or the week before 

that showed that when high-frequency traders—these traders that 

I call cheetah traders because they go fast, fast, fast—that when 

they are in the market they tend to gain more when they are trading with a smaller trader or a passive trader. A lot of these guys 

are sort of commercial ag folks because these high speed traders 

are very, very quick. The argument on their behalf—on the cheetah’s behalf—is that they provide liquidity to the markets, and that 

is obviously a good thing in general, but it is fleeting liquidity in 

that they are not there to hedge your bean or rice or corn crop for 

the season; they are there for 5 seconds and they are in and out 

of the market. 

So there have been a lot of examples, Congressman, where we 

have seen extreme volatility where these cheetah traders are in the 

market. You can go back to a few months ago when we saw crude 

oil go down $3 in 60 seconds. That was in part because cheetahs 

were heavily in the market. So there are many examples. We have 

seen it. We have seen it in India recently. We see it in the stock 

market as you know. You have followed that very often when Kraft 

shifted to NASDAQ. 

So I am concerned that there are some basic, prudent steps that 

need to be taken. They are not even required to be registered with 

us now, which means that we can’t request their books and records. 

They are not required to test their programs. They are not required 

to have kill switches, and importantly, they are not required or we 

don’t mandate that they stop what they call wash trading. That is 

when their trades bump into each other. They trade with themselves. And that is a big problem in my view. I can’t really talk 

about the extent to which they do this cross trading, but I don’t 

think that is good for markets. It is illegal and we need to do a 

better job of enforcing it, Congressman. 

Mr. GARAMENDI. A quick question, maybe a quick answer. Does 

the Commission have the authority to deal with these issues? 

Mr. CHILTON. We have a lot of authority to deal with it, but quite 

frankly, it has been like drinking out of a fire hose with DoddFrank. So it is one of the reasons that I raised this earlier as an 

issue for reauthorization because we still have another 20 rules to 

finish, and so I think that we haven’t been able to focus on it like 

we should. 

Mr. GARAMENDI. Excuse me for interrupting but I try to be obedient here as with regard to the clock. 

Mr. Pearson, how about the view from the European Union on 

high-frequency trading? 

Mr. PEARSON. Thank you for the question, Congressman. 

Yes, we have seen the concerns expressed by Mr. Chilton. Our 

rules are currently in the making. They are not yet on the statute 

book, but the concerns express all the underlying issues that Mr. 

39

Chilton has made. And again there is another example that we 

need to work on this together. We need similar rules in the United 

States as we would have in the European Union. It makes no sense 

to regulate these rules in this jurisdiction in a slightly different 

manner than in the European Union or any other jurisdiction. 

Mr. GARAMENDI. So you are moving forward in the European 

Union——

Mr. PEARSON. Certainly, we are. 

Mr. GARAMENDI.—to deal with these sets of issues? 

Mr. PEARSON. We certainly are moving forward. 

Mr. GARAMENDI. And perhaps the volume of the fire hose will diminish and the Commission can get to it here. 

Mr. PEARSON. Mr. Chilton drinks from one fire hose; I have to 

drink from 27 at the same time, so——

Mr. GARAMENDI. I yield back my time. Thank you. 

Mr. CRAWFORD The gentleman yields back. 

Just real quick, Mr. Chilton, high-frequency traders, you referred 

to them as cheetahs. 

Mr. CHILTON. Yes. 

Mr. CRAWFORD Can I suggest maybe another name? That really 

kind of sounds bad. I know that you are making——

Mr. CHILTON. You can suggest it but it is in the lexicon now I 

am afraid, Congressman. 

Mr. CRAWFORD Yes, that is too bad. 

Mr. CHILTON. I am not saying cheaters, not like Boston card 

cheaters. I am saying cheetahs because they are fast——

Mr. CRAWFORD I understand. 

Mr. CHILTON.—and scooping up micro dollars in milliseconds. 

Mr. CRAWFORD I get it completely, but I just thought that might 

be an unfortunate choice of words, particularly in this environment, but that is another subject. 

The chair recognizes the gentleman from New York, Mr. Gibson, 

for 5 minutes. 

Mr. GIBSON. Well, thanks, Mr. Chairman, and I appreciate the 

panelists. It has been an illuminating dialogue here this morning. 

And I thought I would take advantage of this opportunity to perhaps get to a finer point on recommendations, hearing from Mr. 

Kono and Mr. Pearson. It certainly has been encouraging to hear 

that we share that we want to have more collaboration, going forward. I am interested in your recommendation, specifically with regard to process, what recommendations you have so that we 

achieve this goal of closer coordination. Mr. Kono first. 

Mr. KONO. Thank you very much for your question. 

First, we do have now a group of regulators from the major markets of OTC derivatives and we have agreed to have regular meetings and also to coordinate as quickly as possible on all of the aspects that have been discussed today. On the other hand, IOSCO, 

where I am now chairing the Board, can certainly provide its support to this process, and in the past, IOSCO has been developing 

related standards with respect to cooperation and enforcement. 

There is what we call an MMOU, a Multilateral Memorandum of 

Understanding, which enables regulators to exchange information 

when necessary in the course of their enforcement actions. I think 

this can be further extended and we also should have more signatoVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00043 Fmt 6633 Sfmt 6601 I:\DOCS\112-35\77833.TXT BRIAN
40

ries to this MMOU in all those respects. So certainly regulators can 

do better in terms of making use of such international forums and 

also working closely together. 

Mr. PEARSON. Thank you, sir. I will process three points. The 

first is that we actually need to agree that there is a problem. It 

doesn’t make a lot of sense sitting around the table if some of or 

one of the counterparties is in denial and says there is no problem 

because either I disagree or I don’t have the time to work through 

the problem with you. 

The second thing is to work through what the problem actually 

is, and that means time. This is very, very, very complex. And if 

we get it wrong, we will get it horribly wrong. And we are drafting 

history here for the global market so we need the time to work it 

through and accept that there is a problem. If there is a problem, 

there is a solution and that is a solution that has to work for everybody around the table. 

The third point is registration. A delay of the impact of registration doesn’t help. You simply delay the problem but you don’t eliminate the problem. If anybody thinks we can eliminate the problem 

of registration within 6 months, I am happy to sign up to that. But 

what sense does it make to require firms around the planet to register if you can’t tell them what the consequences of registration 

will be and this gamble on solving this within 6 months. I dearly 

hope you will be able to solve it in 6 months but I sure would like 

to have some up-front clarity about that for our firms outside of the 

United States of America, sir. 

Mr. GIBSON. I appreciate that. And I would like to hear Mr. 

Chilton and Ms. Sommers’ reactions specifically to those points. 

Mr. CHILTON. Thanks, Congressman. 

And let me just restate with a dialogue I was having a little bit 

earlier. I am not suggesting that our proposal was perfect or 

shouldn’t be tweaked in some manner. I am just saying that I 

think we will get to it before the end of the year. So when I was 

having this conversation about what we can do, guidance, et cetera,

I am not suggesting we shouldn’t make some changes and we are 

working on that right now on some of the changes internally. But 

I don’t disagree with Mr. Pearson at all. I think it makes a lot of 

sense and I agree with about everything he says, that it could go 

horribly wrong if we don’t coordinate. We don’t want regulatory arbitrage. That is the big negative to me of us going too far too fast 

is that companies will migrate to nations with the thinnest of rule 

books, with less rules. That is not what Dodd-Frank wanted. Congress wanted to make sure that we protected the U.S. economy 

from a big bailout, from systemic risk, to add the transparency. So 

that is the main goal. We have to keep our eyes focused on that 

and realize that if it is going to take a few more months to get it 

right, that is certainly worth the wait. 

Mr. GIBSON. Okay, so just to make sure I heard you correctly, 

with regard to problem, definition, time, and registration, and notwithstanding earlier comments about ballpark figures in terms of 

when you would publish, you feel it is important to address these 

points and to get that right before you publish? 

Mr. CHILTON. Absolutely, Congressman. Now, when I talk about 

guidance, there may be things that we don’t anticipate because we 

41

didn’t understand this, as Mr. Pearson says, $639 trillion OTC 

market. We never viewed it. So we are actually learning things as 

we go along. So I agree. We should get it right the first time. I hope 

we do. We are trying. But the important point is if we do make a 

mistake that we can remedy it. And so I am hopeful we change our 

proposed exemptive order in the next couple of weeks, that we provide this relief for another time certain, perhaps a 6 month time 

horizon, and then we work with our colleagues across the world to 

try to make sure that we have a global harmonized system of regulatory regimes. 

Ms. SOMMERS. Thank you, Congressman. I think certainly the 

most important part of both what Mr. Pearson and Commissioner 

Chilton has said is that we are working together with our global 

counterparts. I think we are all very hopeful that we will come to 

a mutually agreeable solution but that it is important that the 

CFTC in the meantime does not impose our regulations on those 

entities until we know how this framework is going to work out. 

Mr. GIBSON. I appreciate all that testimony and sorry to go over, 

Chairman. I yield back. 

Mr. CRAWFORD The gentleman’s time has expired. 

The chair recognizes the gentleman from Texas, Mr. Neugebauer, 

for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Chilton used a holiday movie, It’s a Wonderful Life. As I am 

talking to the market participants, particularly in the swaps area, 

they think the Grinch has stolen Christmas. And one of the things 

Mr. Gensler testified yesterday and one of the things that was 

brought out is that over the last couple of years, we have cautioned 

you, and some of you mentioned it in your testimony about making 

sure that we understand what we are trying to regulate and what 

the consequences of that regulation are and making sure that we 

don’t disrupt these markets. And so then, if that was the goal, and 

we look at the swaps market, for example, right now where ICE 

has just announced that they are moving trillions of dollars worth 

of transactions to the futures area, the market is telling you something here. 

And I also talked to some folks the other day and said they are 

having trouble and said some of their customers are reluctant to 

trade with them until some of these issues are worked out, particularly on the registration issue and the cross-border issue. And so 

some of the businesses are moving to foreign countries because 

they are not sure whether they are going to be dragged into this 

regulation, and then they don’t know what the regulation is actually going to be and what the consequences of dealing with those 

firms are. 

And so one of the things that is a very troubling to me is that, 

yes, we talk about, well, we had cost-benefit analyses. I have seen 

some of those cost-benefit analyses and they are marginal at best. 

Commissioner Sommers, what should we be doing different here? 

I am not sure that we are moving in a direction that is—I mean 

the whole original plan, for example, for the derivatives in the OTC 

was just to bring transparency. It appears we have moved pass 

transparency into we are almost trying to micromanage those markets. Would you agree with that? 

42

Ms. SOMMERS. I do. Congressman, I think that one of the things 

that we could have done that we chose not to do, we could have 

taken the lead of the SEC on these issues in implementing the 

Title VII reform in that they are passing their rules and not requiring compliance until all of the rules are finished so they can look 

holistically at how the regime is going to be set up before they require compliance. And where we have run into trouble and where 

we have had to issue dozens of no-action letters to market participants because they can’t comply is because our rule set isn’t finished. In requiring compliance before we are finished has created 

problems. 

Mr. NEUGEBAUER. And so why aren’t we doing that? 

Ms. SOMMERS. That decision was made that we would not do that 

and I am not sure why. I would have been supportive of that. 

Mr. NEUGEBAUER. Was that something that was voted on or was 

that just——

Ms. SOMMERS. No, it was not. 

Mr. NEUGEBAUER.—unilaterally determined by Mr. Gensler? 

Ms. SOMMERS. It was determined by the Chairman. 

Mr. NEUGEBAUER. Yes. And so we are seeing some consequences 

of that? 

Ms. SOMMERS. Yes, sir. 

Mr. NEUGEBAUER. Mr. Chilton, do you have some response to 

that? 

Mr. CHILTON. Yes, and I hate disagreeing with Members of Congress, particularly people that I have worked with before and I 

really don’t like to disagree with my colleague. I think Congress 

was pretty clear that it wasn’t just transparency, sir, in the OTC 

market. Congress wanted us to guard against systemic risk so that 

if—look, risk is part of these markets. Everybody understands that. 

But if you go down, you shouldn’t take—to risk another analogy—

all the Whos in Whoville with you. I mean we don’t want to have 

another bailout. I think that is really an important part of DoddFrank, not just the transparency. 

Mr. NEUGEBAUER. Well, the thing about the over-the-counter 

market was that people didn’t quite understand—they felt like that 

there could be systemic risk because they weren’t quite sure what 

kind of space is out there. I am not sure how much of a systemic 

risk that that market actually was and I am not sure that we have 

done anything that has reduced if it is a systemic risk at this particular point in time. 

But what I do understand is that those are very important pieces 

of capital formation in our country and very important risk management tools, as far as you know, one of the gentlemen was talking about a while ago about keeping the cost of energy down for 

Americans. And if we have these markets who are trying to move 

away, market participants not wanting to participate, then we obviously are doing something that is not positive. 

Mr. CHILTON. I don’t disagree with you on the latter part, Congressman. I know your time is up so I will be very brief, but Bear 

Stearns, Lehman Brothers, those are a direct result of OTC trading. There wasn’t a requirement that they value their OTC trades 

with the counterparty. They valued it at whatever they wanted it. 

Lehman Brothers in their final statement before they went down 

43

was leveraged 30 to 1. That is the type of systemic risk stuff that 

we are trying to address at least. 

Mr. CRAWFORD The gentleman’s time has expired. 

The chair recognizes the gentleman from Kansas, Mr. 

Huelskamp, for 5 minutes. 

Mr. HUELSKAMP. Thank you, Mr. Chairman. A lot of Hollywood 

themes, Mr. Commissioner, I appreciate that. 

I would like to follow up on a related theme. Congressman 

McGovern had mentioned the MF Global situation. In your opening 

comments you talked about folks in that particular movie that you 

referenced, someone is going to serve time in jail. It has been quite 

a few months and I have yet to see anything, anybody really punished, or certainly nobody in jail for the MF Global situation. And 

so I wonder if you might indicate what is happening on that front 

and we can talk about what happened 4 years ago. I am worried 

about something that is impacting constituents in my district yet 

today. 

Ms. SOMMERS. Congressman, as I said before, our enforcement 

investigation is ongoing and we continue to make significant 

progress on that case, but I am unable to discuss any of the specifics of our enforcement investigation. 

Mr. HUELSKAMP. Mr. Gensler is still not participating in that investigation? What is the latest of his status in there given his role? 

Ms. SOMMERS. He is not participating in the enforcement investigation but he is in charge of any type of lessons learned or our 

policy changes with regard to customer protection. 

Mr. HUELSKAMP. And Commissioner, I appreciate the difficulties 

or inability to say what is going on there, but can anyone say when 

we might have some information? My constituents see the gentleman—I mean Mr. Corzine, he was directly responsible and he is 

still walking around and we don’t know if he is being investigated. 

Folks haven’t been made whole. I mean we can talk about Lehman 

Brothers and talk about that, but clearly, when are we going to 

find out what is going on and when are we going to hold someone 

accountable here? 

And I am going to have a follow-up question with Mr. Pearson 

because there is a connection apparently with cross-border with 

MF Global and I am curious what connection is going on, what investigations are going on over here. And we are talking about trying to solve a future problem; I am trying to make some constituents whole today. They are still waiting. And to just be able to tell 

them, well, we don’t know yet after a year. And then maybe Mr. 

Chilton has some information on that. 

Mr. CHILTON. Well, I know that it is frustrating when people 

don’t know and I hate to speak for her but it is frustrating for us 

to not be able to explain certain things. But when these are investigations, they are very difficult for us to talk publicly. There is always the option, Mr. Chairman, of calling an executive session and 

more information could be provided. I am not suggesting that; if 

you are really concerned and you really want to find out more 

about it, that is one way that you can find out some more about 

it that we can’t discuss in public. 

Mr. HUELSKAMP. I appreciate that. And one follow-up on Mr. 

McGovern’s line of questions as well—I mean waiting for some proVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00047 Fmt 6633 Sfmt 6601 I:\DOCS\112-35\77833.TXT BRIAN
44

posals—what immediate things were done to prevent that in the 

future? 

Mr. CHILTON. Several things: first, that we are requiring actual 

24/7, 365 electronic access to the bank records instead of just relying on them telling us it is the case. Second, when they reach sort 

of these things that I call liquidity levels—they are called something more complicated in our rule—but when they are running 

low on liquidity, they have to transfer the customers’ funds to another entity. And then finally, the third point is that if they don’t 

transfer the customer funds to somebody else, we can mandate that 

it be done. So those are three things. There are others, too, Congressman, but those are the three key things for me. 

Mr. HUELSKAMP. Have they been fully implemented? 

Mr. CHILTON. No, they are proposals. They are not fully implemented yet. 

Mr. HUELSKAMP. And do we know when those might be implemented to provide protections to——

Mr. CHILTON. A couple of months, maybe the end of the year is 

it? No, next several months, Congressman. 

Mr. HUELSKAMP. Okay. And Mr. Pearson, if I might, what is happening on your front? I mean do you have these particular regulations in effect for your traders in the EU and can you describe how 

MF Global participates in those or did participate in that? 

Mr. PEARSON. The situation is slightly different. We have a different approach to segregation of client funds and protection of 

funds, and that is a different legal approach, which goes somewhat 

further than the one that you are discussing over here. So we acknowledge the issue. We are also regulating the issue that has already been laid out in European regulation. We end up in more or 

less the same space. So we are absolutely cognizant and we have 

worked together with the CFTC very much to test whether our systems are comparable to yours and whether they are stress-resistant 

on a cross-border basis. And I am happy to say that so far that 

does appear to be the case. 

Mr. HUELSKAMP. So do you think there are more or less protections under your regimen versus ours? 

Mr. PEARSON. It is a different set of protections, Congressman. 

The protection is different in that we have a more direct set of protections and less indirect set of getting there as you have in the 

United States of America. The end result is the same but the way 

we get there is slightly different. 

Mr. HUELSKAMP. Okay. Well, thank you, Mr. Pearson. I appreciate the questions and look forward to actual implementation of 

where we are heading. I am actually a little more nervous than 

when I started that we have some things out there in a few months 

we might fully implement them and I will have some follow-up 

questions of what exactly are the risks that remain in the system 

then. Thank you. I appreciate it. 

I yield back. 

Mr. CRAWFORD The gentleman’s time has expired. 

The chair recognizes the gentlelady from North Carolina, Mrs. 

Ellmers, for 5 minutes. 

Mrs. ELLMERS. Thank you. And it looks like I am probably the 

last questioning. And I just want to say thank you, too, to our 

45

panel. I really like this system of bringing everyone together at the 

table at the same time so that everyone can hear the information 

being exchanged, and I think that is very helpful for us. 

Mr. Kono, I have a question for you. The analogy of risk spilling 

over into and onto U.S. shores in times of crisis has been used a 

lot recently. And certainly, we want to avoid such a scenario. How 

can that scenario be avoided without adopting an overly strict regime that does not respect the ability of foreign regulators? 

Mr. KONO. Thank you very much for your question, Congresswoman. 

And in fact my point was that certainly we understand those 

risks. And in fact if I may mention this, I was at the frontlines of 

supervision when the Lehman affair did occur. And in fact we have 

basically the same problem still today. We are still in the course 

of fixing that in the sense that we do not have enough flow of information plus enough tools to deal with such cross-border issues effectively in coordination with foreign regulators. And once that is 

established, a close cooperation, close exchange of information is established, we will do much better in preventing such risks from 

flowing from shore to shore. 

Mrs. ELLMERS. Thank you, Mr. Kono. 

Mr. Pearson, in Chairman Gensler’s testimony yesterday, he 

stated, ‘‘I think if we do not cover the guaranteed affiliates offshore 

that you can basically blow a hole out from the bottom of Title VII 

and all of what Congress intended on transparency and risk.’’ It 

doesn’t appear that he has much faith in foreign governments 

being able to properly regulate their own affiliations and jurisdictions. How do you feel about this and do you see this as being very 

problematic? 

Mr. PEARSON. Thank you, Congresswoman Ellmers. We take a 

slightly different view on this. 

There are a couple of points here and that is it cuts both ways. 

If the U.S. affiliate abroad is guaranteed by the U.S. parent and 

the U.S. taxpayers, the same applies to our affiliates here in the 

United States of America. Why is it that we do not apply the same 

approach as proposed by the CFTC? Why is it that we do not trust 

the United States’ regulators to regulate our firms here and the 

U.S. regulators would not trust the European regulators to regulate your affiliates in Europe? It is about trust. It is about not understanding the level and the degree of rules that apply on both 

sides of the Atlantic. And as I have tried to explain earlier on, they 

are actually very comparable, very consistent, and in a number of 

cases, our rules are actually a lot stricter than the United States’ 

rules. 

The next point is how do you enforce this? If the European Union 

were to try to enforce its rules on all of its affiliates in the United 

States of America, we would be doing two things that are horribly 

wrong. We would be trying to enforce something we cannot enforce 

in practice; even worse, we would be giving the impression that we 

will be able to enforce this. And if something goes wrong, where 

will the plane land? Will it land here in the United States or with 

a regulator in Europe? So that is the thing that we are trying to 

avoid. We do not afford ourselves a luxury of putting in place a regulatory system that we know we cannot enforce. 

46

Mrs. ELLMERS. Yes. Well, thank you very much. And again, 

thank you to the panel. 

And I yield back the remainder of my time. 

Mr. CRAWFORD Thank you. The gentlelady yields. 

And with no further comments from the Ranking Member, I do 

have some written testimony to enter into the record with unanimous consent, written testimony for the record from Mark Boleat 

from the City of London, and written testimony for the record from 

Steven Maijoor, Chairman of ESMA. 

Without objection, so ordered. 

[The information referred to is located on p. 49.] 

Mr. CRAWFORD And we also have letters for the record. These 

were letters written to Chairman Gensler and CFTC, letters from 

the chief financial administrators from UK, France, Japan, and European Union, a letter from the Swiss regulator FINMA, a letter 

from Hong Kong Secretary of the Treasury, a letter from French 

financial regulators, a letter from British FSA, a letter from the 

FSA of Japan, and the Bank of Japan, a letter from the European 

Securities and Market Authority, a letter from the European Commission, a letter from the Brazilian CVM, and a joint letter from 

the Asian regulators from Hong Kong, Singapore, and Australia. 

Without objection, so ordered. 

[The information referred to is located on p. 52.] 

Mr. CRAWFORD Under the rules of the Committee, the record of 

today’s hearing will remain open for 10 calendar days to receive additional, material, and supplementary written responses from the 

witnesses to any question posed by a Member. I thank the participants for being here today. 

This hearing of the Subcommittee on General Farm Commodities 

and Risk Management is adjourned. 

[Whereupon, at 10:55 a.m., the Subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

47

SUBMITTED STATEMENT BY HON. ERIC A. ‘‘RICK’’ CRAWFORD, A REPRESENTATIVE IN

CONGRESS FROM ARKANSAS; ON BEHALF OF STEVEN MAIJOOR, CHAIR, EUROPEAN

SECURITIES AND MARKETS AUTHORITY

Dear Chairman Conaway, Ranking Member Boswell, and Members of the Committee,

I would like to thank you on behalf of ESMA for your invitation to testify before 

this Committee on the important topic of derivatives reform. Unfortunately, due to 

other urgent obligations I am unable to be physically present at today’s hearing. 

ESMA is submitting this statement to highlight, in particular, some issues in relation to the application of the Dodd-Frank Act to non-U.S. persons. I know that the 

European Commission, with which we have worked very closely in this process, is 

attending the hearing and will be able to expand on some of these points. 

I will now briefly introduce ESMA to you. As an independent agency of the European Union (EU) our mission is to enhance the protection of investors and reinforce 

stable and well-functioning financial markets in the EU. ESMA achieves this mission by building the single rule book for EU financial markets and ensuring its consistent application and supervision across the EU. ESMA also contributes to the supervision of financial services firms with a pan-European reach, either through direct supervision or through the active coordination of national supervisory activity. 

ESMA is deeply committed to finding convergent regulatory solutions to ensure 

there is an internationally coordinated application of the G20 commitments. The 

Dodd-Frank Act in the United States and the EMIR Regulation in the EU have 

many similarities, and both regimes are broadly aligned on many substantial points. 

However, there are some differences that require joint action and mutual understanding by regulators, like the CFTC and ESMA, which are tasked with drafting 

the secondary regulation that will allow the implementation of the respective Act 

and Regulation. 

One of the differences between our respective regulatory frameworks relates to 

the registration of foreign entities, such as swap dealers (when they fall above the 

relevant threshold), which is required under U.S. rules but not under EU rules. This 

registration requirement will apply to entities that are already authorised as dealers 

(investment firms or banks) under EU rules, and the U.S. regime will therefore 

apply to entities and transactions that are also subject to EU rules. As the two sets 

of rules are similar in substance, there is a clear case for avoiding the situation 

where a particular entity or transaction is simultaneously subject to two sets of 

rules. The application of two sets of rules to a single entity or transaction will lead 

to legal uncertainty and will be unnecessarily burdensome for firms. 

The main relevant international regulators have been working together to seek 

ways to achieve convergence on the application of the rules that legislators in our 

respective jurisdictions enacted to reform OTC derivatives markets. ESMA has cooperated with its peers in other jurisdictions and found many points in common, including with the CFTC. As highlighted in the statement issued by the OTC Derivatives Market Regulators following their meeting on 28 November, a number of conflicting, duplicative and inconsistent requirements have been identified when 

analysing the simultaneous application of different national regulations. These requirements, if applied on a cross-border basis to the same entities and transactions, 

would, in certain cases, impede a transaction from taking place or might impede an 

entity from operating with U.S. counterparties. This would have serious consequences for global market liquidity and might even have financial stability consequences. 

These conflicting and duplicative requirements are, amongst others:

(1) different applications of the clearing obligation;

(2) different bilateral margin requirements;

(3) privacy and data protection constraints;

(4) different scope and exemptions (non-financial counterparties, inter-affiliates, 

pension funds, small banks, etc.);

(5) different requirements for CCPs and trade repositories; and

(6) indemnification requirements in the U.S.

The group of international OTC Derivatives Market Regulators reached some 

common understanding of the problems that these conflicting and duplicative requirements may give rise to. They have also agreed to carry out further work to 

identify mutually acceptable solutions to address these problems, but more work is 

needed. 

48

ESMA considers that it is of fundamental importance to avoid the application of 

two or more sets of rules to the same entities or transactions, if those entities and 

transactions are subject to appropriate requirements in their home jurisdiction. 

Therefore, we would urge U.S. regulators to rely to the maximum extent on equivalent requirements enshrined in EU law, instead of imposing U.S. requirements 

when those non-U.S. entities are dealing with U.S. persons. When a duplicative application of rules cannot be avoided, we believe it is essential to identify and mitigate any possible conflict that might arise from that situation. 

ESMA has welcomed as a workable solution, the use of mechanisms like ‘‘substituted compliance’’, which would allow U.S.-registered foreign swap dealers to 

apply their home jurisdiction rules, to the extent that they are producing the same 

result as the corresponding U.S. rules. However, while this is moving in the right 

direction, we remain concerned about the fact that in its current version it would 

not be applicable to transactions in which one of the counterparties is a person established or domiciled in the U.S. We remain confident that, through common work, 

we will reach an agreement to allow the maximum possible use of mutual recognition and substituted compliance as ways to minimise conflicts and overlaps between 

different sets of laws. 

Pending any such agreement, and until a framework for dealing with the above 

issues is finalised, we are of the view that registration and other requirements 

should be suspended for foreign entities. In this vein, ESMA would like to express 

its strong concerns about maintaining the deadline for the registration of foreign 

swap dealers by the end of 2012, despite a possible temporary waiver from some 

related obligations. This is due to the three reasons outlined below. 

Firstly, the registration requirement that EU swap dealers face is required at a 

stage when several associated rules that they will have to comply with in the future 

are not yet final. In addition, international coordination efforts are still under development and subject to the dialogue between international OTC Derivatives Market 

regulators. Therefore, foreign swap dealers would be required to register without 

knowing with sufficient certainty the complete set of rules that will bind them as 

a consequence of their registration, and how those rules will be applied in an international context—including how substituted compliance will work. 

Secondly, ESMA remains concerned about the fact that the registration application grants access to the U.S. supervisors and the U.S. Department of Justice to the 

books and records of registered swap dealers. It is important to reconcile this with 

the privacy or blocking laws that in many jurisdictions restrict the type of data that 

banks and investment firms can share with anyone except their national supervisors 

with a statutory power to require those data. 

Thirdly, while we have achieved some progress on reaching an agreed approach 

to resolving cross-border issues, our international dialogue has not yet been exhausted and, therefore, fixing the registration requirement ahead of the conclusion 

of that dialogue could undermine the above-mentioned cooperation process. 

I would like to thank you again for the opportunity to submit ESMA’s views on 

this important matter to your Committee. 

Yours sincerely,

STEVEN MAIJOOR, 

Chair, 

European Securities and Markets Authority. 

SUBMITTED STATEMENT BY HON. ERIC A. ‘‘RICK’’ CRAWFORD, A REPRESENTATIVE IN

CONGRESS FROM ARKANSAS; ON BEHALF OF MARK BOLEAT, CHAIRMAN, POLICY AND

RESOURCES COMMITTEE, CITY OF LONDON

Chairman Conway, Ranking Member Boswell, and Members of the Subcommittee:

Thank you for inviting me to testify before you today, I welcome this opportunity 

and apologise that I cannot be there with you to attend this hearing in person. In 

my absence, I have prepared the following testimony, which outlines my views on 

the topic of ‘‘Dodd-Frank Derivatives Reform: Challenges Facing U.S. and International Markets’’. 

I am Policy Chairman at the City of London Corporation, which is the local government authority for the City of London. In the role of Policy Chairman, I am responsible for overseeing and coordinating the agenda of the City of London and this 

includes a remit for strategy, resource allocation and engagement with legislators 

and regulators in the UK, Europe and across the world on policy issues affecting 

London as a global financial centre. 

49

1http://www.cftc.gov/PressRoom/PressReleases/pr6439-12. 

In my written testimony I would like to focus on three key challenges that I see 

facing U.S. and international markets because of Dodd-Frank derivatives reform 

and explain what action I think could be taken in order to resolve these challenges. 

I appreciate this Subcommittee’s attention on the international dimension at this 

hearing because the past few years have demonstrated both the highly global nature 

of the financial markets and the need, where possible, to find international solutions 

especially through the G20. I support the efforts of the U.S. regulatory agencies to 

provide transparency and lower risk through increased clearing and swap dealer 

oversight but I have particular concerns regarding the extraterritorial application 

of some of the rules that form part of Dodd-Frank derivatives reform and the implications for the U.S. and international markets. I also strongly welcome the recent 

joint press statement of leaders on Operating Principles and Areas of Exploration 

in the Regulation of the Cross-Border OTC Derivatives Market 1 and their identification of the areas that would be further explored in order to address the concerns 

that have been raised around extraterritorial requirements. However, I fear that 

given the scope of what is to be explored and the timescales for implementation and 

the difficulty inherent in jurisdictions moving at different speeds, much more needs 

to be done to better coordinate international regulatory regimes. 

In my consideration of challenges facing the U.S. and international markets, I will 

firstly discuss conflicting, inconsistent and duplicative rules. Secondly, I will explain 

my concerns about the gaps in guidance and clarification that need to be addressed 

given the sequencing and timing of Dodd-Frank derivatives reform. Thirdly and finally, I will discuss the need for consistent margin requirements across G20 regimes. On all of these issues, I will outline the problem facing U.S. and international markets, the potential impact and what could be done to address these 

problems. 

1. The Challenge of Conflicting, Inconsistent and Duplicative Rules 

I am concerned that under Dodd-Frank derivatives reform, cross-border transactions could be subject to duplicative, inconsistent and even conflicting rules. The 

proposed cross-border guidance from the Commodity Futures Trading Commission 

(CFTC) does not guarantee ‘‘substitute compliance’’ for countries with equivalent 

regulatory regimes and instead allows the CFTC to determine which elements of a 

foreign jurisdiction’s regulatory regime it will recognise. 

Having two sets of rules to comply with could increase compliance costs for the 

entities registered with the CFTC as swaps dealers, including non-U.S. branches 

and foreign subsidiaries of U.S. banks as well as foreign dealers, and end-users. 

Many end-users, whether based in the UK, U.S. or elsewhere, have operations in 

multiple jurisdictions, through numerous affiliates. These companies often manage 

risks arising from their foreign operations by executing hedges out of foreign subsidiaries, as part of their overall efforts to manage the risks inherent in their global 

commercial and business operations. Their ability to do so effectively and efficiently 

improves their ability to plan for the future, reduce volatility in their business, and 

offer more stable prices to their customers. It facilitates the flow of goods and services in a global economy, and enhances their role as drivers of economic growth and 

job creation in communities across the globe. 

Failure to address inconsistent, duplicative or conflicting requirements for crossborder transactions could create strong disincentives for both non-U.S. end-users to 

trade with U.S. counterparties, or for non-U.S. dealers to trade with U.S. end-users. 

Having a smaller pool of potential counterparties could reduce liquidity and the efficient pricing that having wide selection of counterparties provides. At the same 

time, a reduced pool of counterparties may inhibit an end-user’s ability to diversify 

its exposures to counterparties, increasing the concentration of exposure, for example, to counterparties in certain regions. 

I would therefore ask that these inconsistent, duplicative or conflicting rules for 

cross-border transactions are resolved with ‘‘substitute compliance’’ (allowing them 

to be referred to the home regulator) to ensure that international regulatory regimes 

are more closely aligned. Further clarification around the broad definition of a U.S. 

person would also help address some of the duplication. 

2. The Challenge of Gaps in Guidance and Clarification Given the Sequencing and Timing of Dodd-Frank Derivatives Reform 

In terms of the sequencing and timing of Dodd-Frank derivatives reform, important elements remain unclear and there are areas where insufficient clarification 

and guidance on cross-border rules has been provided, given the impending implementation timeline. The finalised cross-border guidance is yet to be released, causVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00053 Fmt 6621 Sfmt 6621 I:\DOCS\112-35\77833.TXT BRIAN
50

ing uncertainty for non-U.S. entities over the need to register as a swap dealer, the 

designation of Commodity Pool Operators as well as the aforementioned scope of 

‘‘substitute compliance’’. 

The lack of clarity and guidance on these issues is causing considerable uncertainty in U.S. and international markets. This could result in a shift in transactions, 

particularly from the U.S. to other markets, as firms attempt to comply with the 

regulations being implemented despite the uncertainty and it could reduce global liquidity. It has also caused confusion as to whether the cross-border rules within 

Dodd-Frank derivatives reform will be consistent with other national regulatory regimes. 

In order to address this problem, more guidance and clarification is of course 

needed, but a sufficient transition period should also be given so that parties have 

adequate time to comply with regulations. I believe that the application of CFTC 

rules with respect to non-U.S. persons should also be deferred to allow for better 

alignment with other national regulatory regimes and the potential for regulatory 

arbitrage. 

3. The Challenge of Implementing Consistent Margin Requirements Across 

G20 Regimes 

The final challenge I would like to highlight to the Subcommittee is the need for 

consistent margin requirements across G20 regulatory regimes. The inconsistencies 

between proposed margin requirements in the U.S. and the EU are of particular 

concern in this regard. 

As they stand, the proposed margin requirements under Dodd-Frank derivatives 

reform could result in an unlevel playing field between U.S. and European banks 

and possible regulatory arbitrage. The different requirements would also be difficult 

to apply cross-border and significant differences in collateral requirements among 

regulatory regimes would undermine G20 objectives to have consistent global standards for these margin requirements. 

I would therefore call on regulators to work together further on consistency. Even 

if convergence between the EU and the U.S. regulatory schemes on this issue is not 

possible in the near term, equal treatment within each scheme should be sought. 

In summary, I ask the Subcommittee to consider my concerns about firstly, duplicative, incompatible or conflicting requirements; secondly, regulatory uncertainty 

caused by lack of sufficient clarification and guidance; and thirdly, inconsistencies 

in proposed margin requirements. Fragmented or conflicting regulation, even when 

the policy objectives are the same, would have a negative impact on competition and 

consumer choice and on the ability of market users and participants to raise capital, 

manage risk and contribute to economic growth. We should work collectively to 

avoid the risk of impeding or disrupting the efficient functioning of our global financial markets as a result of regulatory fragmentation, which would be to the detriment of consumers, investors and other market participants. I would also urge the 

authorities involved to strengthen international regulatory dialogue and cooperation 

further to ensure a consistent approach that meets the needs of market users, without major unintended consequences, and avoids unilateral action by either side, or 

both. 

Thank you again for this opportunity to submit a testimony to this hearing. I appreciate the Subcommittee’s attention to these issues and remain at your disposal 

to discuss them in further detail should you wish to follow up on them. 

Yours sincerely,

MARK BOLEAT,

Chairman of the Policy and Resources Committee. 

SUBMITTED CORRESPONDENCE BY HON. ERIC A. ‘‘RICK’’ CRAWFORD, A

REPRESENTATIVE IN CONGRESS FROM ARKANSAS

16 July 2012

Hon. GARY GENSLER,

Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

Swap Dealers Registration under Dodd-Frank Act 


11235016.eps
51

Dear Chairman Gensler,

We are writing to express our concerns about the potential extraterritorial effects 

of registration rules for swap dealers. 

We understand that the implementation of Title VII of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act of July 2010 requires substantial rulemaking and have followed the related regulatory developments with interest. We 

share the view that closer monitoring of the derivatives business may, contribute 

to higher market confidence and mitigate systemic risks in highly interconnected 

markets. As regards the CFTC regulations, it is our understanding that the final 

rules adopted so far only address registration issues, while details of specific requirements remain pending. 

According to our information, registration with the CFTC is required by September, probably before the exact reach and scope of the U.S. swap dealer regulatory regime will have been clarified. The CFTC released a Proposed Interpretive 

Guidance and Policy Statement on 29 June 2012 for public consultation to address—

among other issues—the cross-border application of U.S. swap dealer requirements. 

The principle of substituted compliance may thereby only be recognized for certain 

entity level requirements of non-U.S. swap dealers and if the CFTC concludes that 

the foreign jurisdiction’s laws and regulations are comparably robust and comprehensive. Beyond that the demand for direct extraterritorial access to transaction 

data and books and records as well as to entity level information on capital, compliance, risk management is not addressed in the guidance. The potential 

extraterritorial reach of the requirements still remains unclear to us. Hence, for the 

time being, we are not in a position to fully assess the consequences of a registration 

with the CFTC and whether these can be reconciled with Swiss regulatory standards, domestic laws, and supervisory practice. Nonetheless, we have serious doubts 

as to whether the registration as a swap dealer of a Switzerland-domiciled bank as 

a whole can be reconciled with Swiss practice. 

We are particularly concerned about potential CFTC margin requirements for 

swap deals that are not cleared by a central counterparty. If such margin requirements are applied to a Swiss-based entity, this may duplicate the requirements and 

may possibly conflict with international and domestic capital adequacy rules, thereby leading to prudential inefficiencies. Furthermore, certain of the proposed reporting requirements, in particular those regarding trade data and end-customer data, 

and access requirements may raise Swiss privacy and data protection issues as well 

as enforcement difficulties. Due to these concerns, we cannot exclude that FINMA 

may have to deny financial institutions permission to supply certain information or 

grant direct access to U.S. supervisors. 

We are conscious that UBS and Credit Suisse are planning to register as swap 

dealers with the CFTC. In this context, the registration of UBS’s swap business may 

be particularly challenging. Contrary to other swap market participants, UBS does 

not book its derivative transactions through foreign affiliates of the group, but carries these out largely through a branch network. Most of the derivatives traded with 

U.S. counterparties are currently booked in the UBS London or Stamford branches. 

The bank is currently working on shifting its derivatives business to a standalone 

legal entity (UBS Limited London). This process is expected to take several years. 

Based on our current understanding, we are not comfortable with the idea of a 

Swiss-based bank as a whole registering with the National Futures Association 

(NFA) and the CFTC while the extraterritorial effects of the registration remain unclear. 

We are confident, however, that viable alternatives which comply with both of our 

prudential mandates can be found. Such alternatives could include the provisional 

registration of those foreign branches of Swiss-based banks in which swap transactions with U.S. persons are booked until a separate legal entity has been set up, 

or the registration of a U.S. incorporated entity acting as information transfer agent 

for the bank. 

We thank you for your consideration and look forward to discussing these issues 

with you in more detail. Our office will contact you to schedule a telephone call. 

Yours sincerely,

PATRICK RAAFLAUB, MARK BRANSON, 

Chief Executive Officer, Head of Banks Division, 


11235009.eps
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1See Financial Times, 21 June 2012. 2See Annnex I. 3See Annex II. 4Since 15 November 2007, the SEC has decided to remove the requirement for non-U.S. companies reporting under International Financial Reporting Standards (IFRSs) as issued by the 

Swiss Financial Market Supervisory Authority FINMA; Swiss Financial Market Supervisory Authority FINMA. 

CC:

Hon. MARY SCHAPIRO, Chairperson, Securities and Exchange Commission. 

27 July 2012

Hon. GARY GENSLER, Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

Subject: CFTC International Guidance and phased compliance program

Dear Chairman,

As Minister of Economy and Finance and as Chairmen of the Autorite ́ de controˆle 

prudentiel (‘‘ACP’’) and the Autorite ́ des marche ́s financiers (‘‘AMF’’), we are writing 

to share our strong concerns regarding extraterritorial effects of the cross-border application of the swaps provisions of Title VII of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (‘‘Dodd-Frank Act’’). 

This issue was raised last month in an open Letter published by Michel Barnier, 

the EU Commissioner in charge of the Internal Market and Services.1 In February 

2011, we also drew your attention as regards to credit institutions located in France 

that may have to register as Swap dealers or, from case to case, as Major Swap Participants, in the U.S.2

In such a context, we welcome the CFTC’s initiative aiming at defining through 

an Interpretative Guidance, the scope and the boundaries of the U.S. legislation in 

a cross-border context, as well as the proposal for a phased compliance program. In 

particular, we support the concept of ‘‘substituted compliance’’ related to non-U.S. 

Swap Dealers or non-U.S. Major Swap Participants. We are firmly convinced that 

the equivalence system is the best way to prevent overlaps and to achieve an efficient regulation and oversight of OTC de1ivatives markets. Other upcoming European financial regulations propose to adopt a similar cross-border equivalence approach. As fertile as such the concept of ‘‘substituted compliance’’ may be, based on 

the EU legislation (EMIR) 3 and from a very practical point of view, we wish to 

emphasise that any entity-by-entity approach should be articulated with and complemented by the assessment, in a comprehensive perspective, of the rules applicable on both sides of the Atlantic. Indeed, such general approach, combined with an 

appropriate temporary exemptive relief (particularly for transactions between a nonU.S. and a U.S. entity and provided for an extended period of time), should facilitate 

the processing of the files (and reduce the costs for the firms) and avoid any distortion or discrepancies between the entities located in the same jurisdiction (i.e., EU 

or EEA). 

Generally speaking, the mere extension of the scope of registration for Swap Dealers or Major Swap Participants to non-U.S. entities would create regulatory and 

oversight overlaps which cause serious concerns for us and our industry. 

In addition, we would like to point out the main legal impediments we will face, 

namely the professional secrecy rules and the protection of strategic data (‘‘Blocking 

Law’’) which may prevent French entities from freely displaying information you 

may request (such concern should dully be considered, in particular, regarding Form 

7–R). Similarly, you must consider clarifying the scope of the activities which would 

be concerned by the application of the Volcker rule in order to prevent significant 

extraterritorial consequences for the non-resident banking entities (i.e., functional 

and/or structural reorganization) that could induce unexpected impact for both U.S. 

and EU economies. 

Furthermore, we understand that the financial statements of EU Swap Dealers 

and Major Swap Participants which are prepared under IFRS, should be reconciled 

under U.S. GAAP. Such requirements would be contrary to the process of reconciliation initiated a few years ago between the U.S. and the EU accounting standards 

and inconsistent with mutual recognition commitments already taken on both sides 

of the Atlantic.4

53

IASB to reconcile their financial statements to U.S. Generally Accepted Accounting Principles 

(GAAP). In the same way, since December 2008, the European Commission has identified as 

equivalent to IFRS the U.S. GAAPs for listed companies. 

Finally, we consider that the specific issue related to the cross-border transactions 

should also be explicitly covered in the interpretative guidance, especially when 

such transactions occur between an EU and a U.S. counterparty: according to the 

recognition of equivalence and, if appropriate, following the substituted compliance 

decision, authorities should be able to rely on each other, regardless of the type of 

rules concerned. Given the importance of these requirements for market participants, we would also strongly encourage you to adopt a strict and objective definition of the concept of ‘‘U.S. person’’ without criteria that would be excessively subtle 

and difficult to implement and that could finally undermine the effectiveness of our 

common action to regulate OTC derivatives. 

We believe our objectives are the same and are fully convinced that we will succeed in building a sound and coherent global framework leading to improve the 

transparency, the efficiency and the robustness of the OTC derivatives market, in 

accordance with the G20 commitments and based upon a sound transatlantic level 

playing field. We are aware of the current efforts undertaken by U.S. authorities 

and are supportive on pursuing a constructive dialogue between our respective institutions. 

Yours sincerely,

PIERRE MOSCOVICI, CHRISTIAN NOYER, JACQUES DELMAS-MARSALET, 

Minister, Chairman, Interim Chairman, 

Ministe`re de l’e ́conomic et des 

finances; 

Autorite ́ de controˆle prudentiel (ACP) Autorite ́ des marche ́s financiers (AMF) 

CC:

Mrs. MARY L. SCHAPIRO, Chairman of the Securities and Exchange Commission. 

Mr. TIMOTHY GEITHNER, Secretary of the Treasury. 

ANNEX I: JOINT LETTER FROM THE ACP AND THE AMF RELATED TO TITLE VII OF THE

DODD-FRANK ACT OF 11 FEBRUARY 2011

11 February 2011

Hon. GARY GENSLER,

Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

Re: Title VII of the Dodd-Frank Act

Dear Chairman,

As Chairmen of the Autorite ́ de controˆle prudentiel (‘‘ACP’’) and of the Autorite ́ des 

marche ́s financiers (‘‘AMF’’) we take the opportunity of the public consultation on 

your proposed rulemaking to raise specific concerns on the proposed rules related 

to Section 712(d)(1), Section 721(c) and Section 761(b) of Title VII of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’). Although this is not a formal contribution to your consultations we would like to draw 

your attention specifically to the case of foreign-headquartered financial organizations and in particular French entities. 

We understand that the CFTC and the SEC, in consultation with the Board of 

Governors of the Federal Reserve System (‘‘Fed’’), are proposing rules and interpretative guidance to further define the terms ‘‘swap dealer,’’ ‘‘security-based swap 

dealer,’’ ‘‘major swap participant,’’ ‘‘major security-based swap participant,’’ and ‘‘eligible contract participant’’ which would not specifically take into account the case 

of the non-resident entities and, therefore, could have non-desirable extraterritorial 

effects on such entities. 

Based on our common experience, especially in a cross-border prudential supervision and market regulation perspective, we believe that such unilateral approach 

could lead to regulatory overlaps and inconsistencies and therefore be counterproductive. Indeed, the articulation between the different legal and regulatory 


11235010.eps
54

frameworks is an international challenge and is undoubtedly a corner stone for the 

achievement of G20’s commitments. 

Therefore, from a practical point of view, we strongly support for foreign banking 

organizations and other financial institutions (such as asset management companies, investment advisers, private equity funds and other entities that might qualify 

as major swap participants) a mutual recognition regime built around an adequate 

and balanced symmetrical system taking into account the home and the host country regulatory regimes. Thus, without calling into question the registration of nonresident entities as ‘‘swap dealer’’, ‘‘security-based swap dealer’’, ‘‘major swap participant’’ or ‘‘major security-based swap participant’’, we expect that such registration 

will be limited to activities in relation with U.S. counterparties and/or clients and 

will not involve similar obligations to the financial organizations as a whole. The 

obligations for non-resident entities should indeed be proportionate and take into 

equivalent requirements in their home jurisdiction. In this perspective, in order to 

prevent double and recursive regulation, Memoranda of Understanding (MOUs) 

signed between the regulatory authorities concerned could be very useful instruments. Having regard to Section 752 of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, we understand that such an approach 

could be relevant. 

Consequently, taking into consideration the short timeframe of the proposed 

rulemakings, we would be happy to explore with you various options in a constructive approach and we would be pleased to further discuss on this very important 

subject. 

We look forward to our continued co-operation in this field. 

With our best regards,

CHRISTIAN NOYER, JEAN-PIERRE JOUYET, 

Chairman, Chairman, 

Autorite ́ de controˆle prudentiel (ACP) Autorite ́ des marche ́s financiers (AMF) 

CC:

Mrs. MARY L. SCHAPIRO, Chairman of the Securities and Exchange Commission. 

Mr. WILLIAM DUDLEY, Chairman of the Federal Reserve Bank of New York 

ANNEX II: ARTICLE 13 OF EMIR—MECHANISM TO AVOID DUPLICATIVE OR CONFLICTING

RULES

1. The Commission shall be assisted by ESMA in monitoring and preparing reports to the European Parliament and to the Council on the international application 

of principles laid clown in Articles 4 [clearing obligation], 9 [reporting obligation], 

10 [non-financial counterparties] and 11 [Risk-mitigation techniques for OTC derivative contracts not cleared by a CCP], in particular with regard to potential duplicative or conflicting requirements on market participants, and recommend possible action.

2. The Commission may adopt implementing acts declaring that the legal, supervisory and enforcement arrangements of a third country:

(a) are equivalent to the requirements laid down in this regulation under Articles 

4, 9, 10 and 11;

(b) ensure protection of professional secrecy that is equivalent to that set out in 

this Regulation; and

(c) are being effectively applied and enforced in an equitable and non-distortive 

manner so as to ensure effective supervision and enforcement in that third country.

Those implementing acts shall be adopted in accordance with the examination procedure referred to in Article 86(2).

3. An implementing act on equivalence as referred to in paragraph 2 shall imply 

that counterparties entering into a transaction subject to this Regulation shall be 

deemed to have fulfilled the obligations contained in Articles 4, 9, 10 and 11 where 

at least one of the counterparties is established in that third country. 


11235011.eps
55

4. The Commission shall, in cooperation with ESMA, monitor the effective implementation by third countries, for which an implementing act on equivalence has been 

adopted, of the requirements equivalent to those laid down in Articles 4, 9, 10 and 

11 and regularly report, at least on an annual basis, to the European Parliament 

and the Council. Where the report reveals an insufficient or inconsistent application 

of the equivalent requirements by third country authorities, the Commission shall, 

within 30 calendar days of the presentation of the report, withdraw the recognition 

as equivalent of the third country legal framework in question. Where an implementing act on equivalence is withdrawn, counterparties shall automatically be subject again to all requirements laid down in this Regulation’’. 

August 13, 2012

Hon. GARY GENSLER, Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

Re: Proposed CFTC Cross-Border Releases on Swap Regulations

Dear Gary,

We appreciate the opportunity to comment on the proposed CFTC cross-border interpretative guidance and exemptive order regarding compliance with certain swap 

regulations. We are writing to ask the Commission’s consideration of our concerns 

about these proposals, in particular about the application of registration and transaction requirements to operations of foreign financial institutions established outside the U.S. 

As to the extraterritorial application of OTC derivatives regulation of the DoddFrank Act, we can understand your concern that risks emanating from an overseas 

entity of a financial group could directly flow back to the whole group, and this 

should be avoided. We believe, however, that such extraterritorial application will 

need to be consistent with the principles of international comity between jurisdictions, as noted in the CFTC proposal. A number of jurisdictions, including Japan, 

have been making significant progress in implementing the G20 commitments, including mandatory clearing and trade reporting, in an internationally consistent and 

coordinated manner toward the agreed deadline of end-2012. The regulations which 

Japan will be implementing from November this year are not identical with U.S. 

regulations, but are consistent with the objectives of the G20 countries to improve 

transparency in the derivatives markets, mitigate systemic risk and protect against 

market abuse, and in this regard share the same goals with the Dodd-Frank Act. 

Against this backdrop, we have two overarching concerns and three specific requests to amend the CFTC proposals as follows. 

I. Overarching Concerns 

Avoidance of Overlapping or Conflicting Regulation 

First, to the extent that U.S. law subjects Japanese financial institutions established and conducting businesses in Japan to U.S. regulation, then this would inevitably lead to overlapping or conflicting regulation, thus placing undue burden not 

only on the financial institution itself but also on other market participants as well. 

In this regard, FSA Japan has the primary responsibility in determining and implementing appropriate regulation of OTC derivatives market participants and their 

transactions in Japan. Therefore, we would like to ask the Commission to reconsider 

the necessity of extraterritorial application of U.S. derivative regulations, including 

swap dealer registration requirements to Japanese financial institutions established 

and conducting businesses in Japan. 

Need for International Coordination in Cross-Border Regulation 

Second, if the scope and timing of application of OTC derivatives regulations to 

cross-border transactions would be different and inconsistent among jurisdictions, 

there are risks that the application of a country’s regulations to cross-border transactions without proper international coordination would unduly impose additional 

costs on those transactions and thereby reduce the liquidity of OTC derivatives markets. For example, where the scope of mandatory clearing in terms of products is 

not identical between jurisdictions and no single CCP is available for clearing the 

transactions of both counterparties, market participants will not be able to enter 

into a transaction for fear of finding themselves in breach of either of the two sets 

of regulations. In this context, FSA Japan intends to address this issue by limiting 

the scope of mandatory clearing to transactions between large domestic market 

56

players at the initial stage of implementation of OTC derivative regulations to enter 

into force in November this year. 

Therefore, we urge the Commission to consider deferring the application of its regulations on cross-border transactions until an internationally consistent approach on 

how to address cross-border regulation of OTC derivatives would be developed (e.g.,

for at least 1 year and renewable, if necessary). 

II. Specific Requests 

In addition to the overarching concerns above, we have the following three specific 

requests to amend the CFTC proposals:

1. Further extension of application of substituted compliance, and making clear 

its details, including due process and timing

2. Deferral of application of CFTC regulations with respect to non-U.S. persons

3. Exclusion of certain transactions from the calculation of swap transactions 

in regard to the de minimis threshold for non-U.S. persons 

1. Further Extension of Application of Substituted Compliance, and Making 

Clear Its Details, Including Due Process and Timing 

In the proposed CFTC guidance, we recognize that the Commission intends to introduce the concept of substituted compliance for the purpose of avoiding duplicative 

application of regulation. While we welcome this step, we have two concerns in this 

regard.

(i) The first concern is that the scope of application of substituted compliance 

is too narrow. We request it to be further extended, so that overlap or conflict 

with Japanese regulation could be avoided as much as possible.

As for entity-level regulations, substituted compliance should apply to all 

types of foreign affiliates of U.S.-based swap dealers, including those with 

swaps booked in the U.S. Substituted compliance should also be extended to a 

broader set of transaction-level requirements. For example, transactions conducted in Japan between Japanese financial institutions and Japanese affiliates 

of U.S.-based swap dealers (swaps booked in the U.S.) should be subject to substituted compliance. In addition, cross-border transactions between the head offices of Japanese financial institutions and U.S.-based swap dealers should be 

able to benefit from substituted compliance.

(ii) The second concern is that the details, including the procedure and implementation timeline of ‘‘substituted compliance’’ are not clear in the proposal. 

The Commission proposes that it would make comparability determinations on 

an individual requirement basis, such as mandatory clearing and trade execution facility, rather than the foreign legislative/regulatory regime as a whole. 

We believe this determination should be made on a country-by-country basis, 

and in a comprehensive manner, from the viewpoint of whether or not foreign 

regulation is broadly in alignment with U.S. regulation and consistent with the 

overall objectives of the G20 commitments. The determination should also take 

into account such elements as further regulations to be introduced in a phased 

manner and the necessity of different regulation in light of divergent practices 

in non-U.S. markets.

Furthermore, when certain requirements under Japanese regulations are not 

identical to those of the U.S. at a particular point in time, it would not be acceptable for us that the Commission applies its regulations in addition to Japanese regulations in place to address the differences. In other words, substituted 

compliance should respect foreign regulations as a set, not on a piecemeal basis. 

2. Deferral of Application of CFTC Regulations With Respect to Non-U.S. 

Persons 

As noted above, we believe that CFTC regulations, including swap dealer registration should, as a matter of principle, not be applied to Japanese financial institutions established and conducting businesses in Japan. Even if Japanese financial institutions would be required to register as swap dealers under limited circumstances, these requirements should be the least onerous, and a sufficient preparation period needs to be ensured. 

In this regard, according to the CFTC rule, the application for registration as 

swap dealer will need to be filed within 60 days after the final rule on the definition 

of swaps is published in the U.S. Federal Register. Although this deadline is applied 

to non-U.S. persons, as well as U.S. persons, we request that the swap dealer registration requirement (along with other obligations that registration entails) should 

not apply to non-U.S. persons before (i) the details, including the procedure and imVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00060 Fmt 6621 Sfmt 6621 I:\DOCS\112-35\77833.TXT BRIAN
57

plementation timeline of substituted compliance become clear, and (ii) the assessment by the Commission for substituted compliance is completed and agreed with 

interested parties. 

3. Exclusion of Certain Transactions From the Calculation of Swap Transactions in Regard to the De Minimis Threshold for Non-U.S. Persons 

Third, the following types of swap transactions should be excluded from the calculation of swap transactions in regard to the de minimis threshold in determining 

the need for swap dealer registration for non-U.S. persons, if non-U.S. persons are 

required to register under limited circumstances.

(i) Transactions between non-U.S. affiliates of non-U.S. persons under common 

control and U.S. persons

We believe that only transactions with U.S. persons conducted by Japanese 

financial institutions established in Japan should be included in determining 

the need for registration as swap dealer. In other words, transactions with U.S. 

persons conducted by entities under common control of Japanese financial institutions established outside Japan (e.g., in the UK and Hong Kong) should not 

be included in the calculation of swap transactions in regard to the de minimis

threshold, with respect to the Japanese financial institutions established in 

Japan.

Furthermore, even if Japanese financial institutions are to be registered as 

swap dealers, their subsidiaries, sister companies or parent companies which 

conduct transactions with U.S. persons below the de minimis threshold should 

not be required to register as swap dealers.

(ii) Transactions between U.S. branches of non-U.S. persons and U.S. persons

According to the proposed guidance, we understand Japanese financial institutions established in Japan do not need to include the notional value of swap 

transactions with U.S. persons in which their U.S. affiliates engage, when calculating the swap transactions in regard to the de minimis threshold. In parallel with this, we believe that transactions between U.S. branches of Japanese 

financial institutions and U.S. persons should also be excluded from the de 

minimis threshold calculation for Japanese financial institutions.

We would Like to kindly request that the Commission take into account the above 

and amend the proposed guidance and order in accordance with our requests. 

Should you have any questions concerning the above, please do not hesitate to contact us. 

Sincerely yours,

MASAMICHI KONO,

Vice Commissioner for International Affairs,

Financial Services Agency, 

Government of Japan;

HIDEO HAYAKAWA, 

Executive Director, 

Bank of Japan.

CC:

Commissioner Ms. JILL E. SOMMERS, CFTC 

Commissioner Mr. BART CHILTON, CFTC 

Commissioner Mr. SCOTT D. O’MALIA, CFTC 

Commissioner Mr. MARK P. WETJEN, CFTC 

Chairman MARY L. SCHAPIRO, SEC 

Under Secretary for International Affairs LAEL BRAINARD, U.S. Department of the 

Treasury 

24 August 2012

DAVID A. STAWICK,

Secretary,


11235012.eps 11235013.eps
58

Commodity Futures Trading Commission, 

Washington, D.C.

Subject: Comment Letter Proposed CFTC Rules

Dear Mr. Stawick,

The European Commission welcomes the opportunity to provide comments on the 

proposed Cross-Border Proposed Interpretive Guidance (RIN 3038–AD57) and the 

Proposed Exemptive Order (RIN 3038–AD85) as published by the Commodity Futures Trading Commission (CFTC) on 12 July. 

These comments should be seen in the important context of our shared commitment in the G20 to comprehensively regulate over-the-counter (OTC) derivative 

markets. Two years ago in Toronto, G20 Leaders reaffirmed their commitment to 

improve transparency and regulatory oversight of OTC derivatives ‘‘in an internationally consistent and non-discriminatory way’’. Since then the European Commission and the CFTC have engaged in a dialogue to fulfil those objectives. Regulatory frameworks that will improve the stability of the financial system are now 

in place in the U.S. and the EU and we have both made great efforts to ensure the 

consistency of our requirements. We have also worked together with a shared objective of avoiding duplicative and conflicting requirements and rules to prevent their 

avoidance. 

Nevertheless, we are of the view that the CFTC’s proposed cross-border Guidance 

and proposed Exemptive Order require further review in order to contribute to 

achieving our common goal. 

Definition of a ‘U.S. Person’

The European Commission understands the CFTC’s concern about exposing the 

U.S. financial system to significant risks through connections with a foreign entity 

which is not resident or established in the U.S. To this end the CFTC proposes a 

wide definition of a ‘U.S. person’. 

This wide definition determines the territorial scope of application of the DoddFrank Act. The European Commission notes the significant potential risk attached 

to this proposed approach. It will maximise the potential for overlap and duplication 

of U.S. regulatory requirements with those of other jurisdictions, including the EU. 

An EU and a U.S. firm that conclude an OTC derivatives contract will be simultaneously subject to EU and U.S. requirements. This will lead to duplication of laws 

and to potentially irreconcilable conflicts of laws for market operators. Examples of 

such situations are the following:

• An EU-dealer could be subject for the same trade to the European regulatory 

requirements (under EMIR, MiFID, and CRD IV) and to CFTC requirements 

implementing the Dodd-Frank Act at the same time.

• A collective investment vehicle managed from the EU, but with a majority ownership by U.S. persons would be subject to regulatory requirements in the EU 

and to Dodd-Frank in the U.S.

Legal uncertainty is increased by the fact that the CFTC’s proposed interpretation 

of the term ‘‘U.S. person’’ is based on a non-exclusive list of entities that fall within 

the definition. It is important for the CFTC to provide further clarification about 

the process for determining any other types of entities that it deems to be ‘‘U.S. persons’’ in the future and how and when it intends to apply regulatory requirements 

to those entities. 

A further consequence and source of concern about the CFTC’s proposed approach 

is its practical and legal enforcement. The application of U.S. rules to non-U.S. firms 

implies that they would need to be enforced by U.S. regulators. In addition to the 

potentially irreconcilable conflicts of laws firms will face and the significant resource 

implications for the CFTC in view of the potentially large number of firms involved, 

this will entail significant supervisory inefficiencies as non-U.S. firms would be supervised by both the CFTC as well as their home regulators. A duplicative application of EU and U.S. rules could also lead to distortive and discriminatory situations. 

Although we have made significant efforts to develop common international standards in the field of OTC derivatives EU and U.S. firms could face permanent legal 

uncertainty if this issue is not resolved. We therefore suggest that the definition of 

a ‘U.S. person’ should be qualified and should not apply to a person or entity that 

is not resident or established in the U.S. if the CFTC can establish that it is resident or established in a jurisdiction which has rules in force that are consistent with 

and comparable to those under the Dodd-Frank Act. 

It is reasonable to expect U.S. authorities to rely on those rules and recognise activities regulated under them as compliant where those activities have been subject 

59

to comparable standards under a foreign jurisdiction. The concept of substituted 

compliance introduced in the guidance is a positive step in this direction but does 

not go far enough to deliver the full benefits of this approach for a consistent international regulation of OTC derivatives markets (see below). 

Registration 

Under existing CFTC rules, Swap Dealers (SD) and Major Swap Participants 

(MSP) will be required to register with the CFTC within 60 days of the final publication of a joint CFTC/SEC rule defining swaps, i.e., before 12 October 2012.

First, we suggest that in view of uncertainties and significant issues identified 

with the definition of a ‘U.S. person’ proposed by the CFTC the registration requirement for non-U.S. persons should be delayed at least until the final cross-border 

Guidance has been published. This will allow firms to determine whether they are 

required to register and will minimize the regulatory risk involved with incorrect 

registration. 

Furthermore, as a consequence of the CFTC’s proposed approach and wide definition of ‘U.S. persons’, many EU firms may be subject to the registration requirement 

with the CFTC. This raises significant concerns.

• According to the CFTC’s proposed interpretation of the Dodd-Frank Act, a registration requirement would apply to a legal person as a whole. In respect of 

a U.S. branch of an EU firm, this may lead to a requirement for the EU-head 

office of the parent company to register with the CFTC. First, if a U.S. branch 

of an EU entity trades only with other non-U.S. persons, there would seem to 

be no question of exposing the U.S. financial system to significant risks. Second, 

in response to the excessively wide scope of U.S. rules, EU banks might consider converting their U.S. branches into affiliates in order to avoid registration 

and its subsequent requirements applying to the parent company. This would 

have the perverse effect of introducing risk into the U.S., as an affiliate of a 

non-U.S. bank will be a fully legally incorporated U.S. entity. Furthermore, EU 

banks would face an increased cost in capital, since they would have to maintain separate capital in these affiliates.

• In terms of process, in the future EU firms would also have to monitor on an 

on-going basis if their volumes of swaps breach the registration thresholds proposed by the CFTC.

We are of the view that these uncertainties, as well as the significant and unnecessary incremental and running costs generated by the obligation to register, could 

be avoided completely if the CFTC were to consider an approach based on a wider 

recognition of EU rules and increased cooperation between EU and U.S. regulators 

as discussed below. 

The treatment of non-EU firms proposed by the Commission in its legislative proposal (MiFID II) in respect of trading in financial instruments in EU financial markets could be a significant step to opening access to EU financial markets for U.S. 

firms. However, the CFTC’s proposed registration requirements could put the adoption of this approach into question as it is difficult to envisage that the EU would 

adopt rules which would create an imbalance in treatment of EU firms under U.S. 

law compared to the treatment granted to U.S. firms under EU law. 

‘Substituted Compliance’

We appreciate the statutory constraints under which the CFTC operates in the 

area of ‘substituted compliance’ and appreciate the efforts made to introduce this 

concept, which shares some similarities with the European ‘equivalence’ approach. 

However, and to limit as much as possible the effects and the cost of registration 

for EU-based firms, we strongly urge the CFTC to remove the registration obligation 

for EU firms since they will be subject to equivalent and comparable requirements. 

This would reduce the incremental costs associated with the registration process 

and alleviate compliance costs. This is similar to the approach adopted in EU legislation. 

We also appreciate that the proposed Exemptive Order addresses certain sequencing issues in relation to the application of a number of requirements. However, the 

proposal offers only temporary relief for entity level-requirements. We believe that 

this should also be extended to transaction-level requirements, including when they 

apply to non-U.S. firms’ transactions with U.S. firms. 

As regards transaction-level requirements, additional fundamental issues arise. 

We have reviewed closely and with great interest the concept of ‘substituted compliance’ described in the proposed rulemaking. It is similar in some respects, but not 

all, to the European concept of ‘equivalence’, and may to a degree also achieve the 

same results. 

60

If we understand the CFTC’s proposals correctly, substituted compliance would 

apply only to transactions between two non-U.S. legal persons. Substituted compliance would not apply to trades involving one U.S. legal person and a non-U.S. legal 

person subject to comparable rules under a third-country regime. In other words, 

this cross-border application of the Dodd-Frank Act would imply that EU firms dealing with U.S. counterparties would always be subject to Dodd-Frank, while U.S. 

firms dealing with EU counterparties could not be subject to EU rules if the EU 

decides to grant equivalence to the U.S. Although the need for U.S. authorities to 

have certainty about the proper regulation of trades entered into by subsidiaries of 

U.S. firms is legitimate, it is difficult to understand why comparable foreign legislation would not equally legitimately achieve the same result. In our view, a comparable and consistent set of rules and requirements in the EU may equally legitimately achieve the result sought by the U.S. authorities. 

Second, wider application of substituted compliance by the CFTC is very important for our consideration of a positive equivalence decision in respect of the U.S. 

The adoption of an equivalence decision by the European Commission would allow 

us to determine that EU firms may be subject to the rules of a specific third country 

and still meet the requirements in EU legislation because they are considered to be 

equivalent. This is a direct and powerful instrument to avoid subjecting EU and 

U.S. firms to duplicative and onerous central clearing and margining requirements. 

The application of multiple sets of rules to the same transaction undermines the 

G20’s financial stability objectives (trades may not be cleared in either jurisdiction), 

it is economically and financially unsustainable for U.S. and EU firms, and it is unwise from a market perspective as trades may migrate to other jurisdictions. The 

power and ability of the European Commission to adopt an equivalence decision to 

avoid all of these profoundly negative effects is subject to one important condition: 

the rules of the third-country concerned must be applied in an ‘efficient and nondistortive’ manner. If this cannot be determined and the rules of a third country 

are considered to result in an unbalanced state of affairs which creates a discrimination of treatment between two jurisdictions, the European Commission could be prevented from granting equivalence. 

Third, we must draw your attention to a requirement in EMIR for the Commission to adopt rules on the basis of technical standards drafted by ESMA specifying 

which transactions between non-EU entities have a ‘direct, significant and foreseeable effect’ on the EU. There are strong similarities between the potential scope of 

this rule—which has not yet been adopted—and section 722(d) of the Dodd-Frank 

Act. If the EU were to promulgate a rule with the same scope as the CFTC proposes 

in its guidance, swaps between two U.S. affiliates of EU firms would be subject to 

EMIR thus leading to the application of multiple rules to U.S. firms. 

Process for Substituted Compliance 

In addition to the limited scope proposed for substituted compliance, we also have 

serious reservations about the manner in which the CFTC proposes to apply that 

approach. 

As proposed, a decision by the CFTC determining substituted compliance will not 

apply to jurisdictions (which is the case under EMIR in the EU) but only to specific 

firms after a chapter by chapter analysis and can be withdrawn from a firm at any 

time. 

We encourage the CFTC to adopt a similar approach to that of the EU which is 

based on the recognition of ‘equivalent’ jurisdictions, and not of individual firms. EU 

entities will be subject to highly harmonised requirements for derivatives in the 

fields of clearing, reporting and margining (EMIR Regulation 648/2012, Markets in 

Financial Instruments Directive and Regulation—in the process of being updated), 

and the Capital Requirements Directive for banking and investment firm solvency. 

We understand that U.S. firms are subject to similar rules and requirements. In 

this situation it would be duplicative to require each EU entity seeking to benefit 

from substituted compliance in the U.S. to separately demonstrate the equivalence 

of these EU rules with Dodd-Frank. When determining acceptability for substituted 

compliance we invite the CFTC to take into consideration whether another jurisdiction complies with consistent and comparable standards. 

The approach proposed by the CFTC will introduce legal uncertainty and higher 

monitoring costs for EU firms than for U.S. firms that might benefit from an EU 

equivalence decision. Moreover, the application on a firm by firm basis could lead 

to different and even discriminatory treatment between firms and jurisdictions. 

We are of the view, however, that an approach that is based on an effective system of ‘substituted compliance’ or ‘equivalence’ requires close cooperation between 

regulatory authorities. The conclusion of Memoranda of Understanding between regulators will be required to establish clear rules and obligations in important fields 

61

1 CFTC/SEC Joint Final Rule and Interpretation: Further Definition of ‘‘Swap,’’ ‘‘SecurityBased Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping.

of regulatory cooperation such as access to information, on-site inspections, etc. The 

European Commission is prepared to provide any necessary assistance to facilitate 

a common framework for the conclusion of such agreements. 

In conclusion, we are grateful for the opportunity to comment on the proposed Interpretative Guidance and Exemptive Order which provide the final cornerstones 

determining how the CFTC intends to contribute to an internationally consistent 

and non-discriminatory regulatory framework for the global OTC derivatives markets. As explained in our comments we firmly believe that the CFTC’s proposals require further review in order to meet that goal. In the absence of this we believe 

that the G20 commitments will not be met and that the efforts that the EU and 

the USA and other jurisdictions have made will potentially result in an uncoordinated, duplicative international regulatory framework for OTC derivative markets. 

This will bring neither comfort to regulators and policymakers, nor clarity and 

transparency to market operators. It will create frequent regulatory conflicts and 

will adversely impact the derivatives markets. 

We look forward to discussing the issues raised in this comment letter with the 

CFTC. 

Yours sincerely,

JONATHAN FAULL, 

Director General, Internal Market and Services, 

European Commission. 

24 August 2012

DAVID A. STAWICK,

Secretary,

Commodity Futures Trading Commission, 

Washington, D.C.

FSA Comment on Proposed Interpretive Guidance and Policy Statement 

on Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act (‘‘Proposed Cross-Border Guidance’’) and Proposed Exemptive Order Regarding Compliance With Certain Swap 

Regulations (‘‘Proposed Exemptive Order’’)

Dear Mr. Stawick,

We appreciate the ongoing dialogue between the CFTC and FSA in relation to the 

cross-border application of the U.S. Dodd-Frank legislation, and we would like to 

take this opportunity to provide comments on behalf of the FSA on the two papers 

released by the CFTC last month. 

Our comments focus on a few areas of concern the FSA has with the proposed 

cross-border guidance and proposed exemptive order. 

Deadline for Registration of Non-U.S. Swap Dealers (‘‘SDs’’) and Major Swap Participants (‘‘MSPs’’) 

We understand that, in accordance with previous CFTC Dodd-Frank rulemakings. 

those SDs and MSPs required to register with the CFTC will be required to do so 

within 60 days of the publication in the U.S. Federal Register of a joint final rule 

with the SEC providing further definitions of ’’swap’’ and related terms.1 We understand that this means that SDs and MSPs will need to register with the CFTC by 

12 October 2012. 

The CFTC acknowledges in its proposed cross-border guidance that there is uncertainty over whether a non-U.S. person’s swap dealing activities will be sufficient to 

require registration as an SD. The proposed guidance is designed, in part, to provide 

clarity on this issue. Non-U.S. firms will therefore not be in a position to determine 

whether they are required to register as an SD or MSP before the final cross-border 

guidance is published. If this is close to, or after 12 October 2012, there is a risk 


11235006.eps
62

2 Regulation (EU) No. 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, Article 13(3). 3Proposed Exemptive Order, Section III. 

that firms will incorrectly register (or conversely. not register when they should), 

which exposes them to regulatory risk. 

We therefore suggest that the CFTC delays imposing the registration requirement 

on non-U.S. persons until a defined period (perhaps 6 months) after the CFTC has 

finalised its cross-border guidance. This would allow firms time to interpret the 

guidance and make an informed and considered decision on the appropriate entities 

to register. 

Application of Transaction-Level Requirements To All Registered SDs and MSPs 

Section III.B.S of the proposed cross-border guidance outlines the application of 

Dodd-Frank transaction-level requirements, specifically ‘‘to require non-U.S. swap 

dealers and non-U.S. MSPs to comply with Transaction-Level Requirements for all 

of their swaps with U.S. persons, other than foreign branches of U.S. persons, as 

counterparties’’. 

The corresponding European Union legislation (the Regulation of the European 

Parliament and of the Council on OTC derivatives, central counterparties and trade 

repositories—‘‘EMIR’’) takes a fundamentally different approach. Under EMIR, 

where a foreign regime is deemed to be equivalent, ‘‘counterparties entering into a 

transaction subject to this Regulation shall be deemed to have fulfilled the obligations contained in [relevant articles] where at least one of the counterparties is established in that third country.’’ 2

We are concerned that the proposed cross-border guidance does not allow for a 

similar equivalence-based process, and will instead require firms to meet DoddFrank transaction-level requirements where one of the counterparties is a U.S. person. In our view this has the potential to have a real impact on trades between UK 

and U.S. firms. For example, it is likely to result in the Dodd-Frank requirements 

being exported to a wide range of UK (and other EU) firms, for example resulting 

in any UK firm doing business with a U.S. firm needing to trade on a CFTC-registered Swap Execution Facility and clear the trade on a CFTC-registered clearing 

organisation. Were any non-U.S. legislation/regulation to take a similar approach to 

the proposed cross-border guidance. then a real risk of regulatory conflict for crossborder trades, potentially prohibiting such business, would exist. 

We would therefore encourage the CFTC to take an approach similar to that 

taken in EMIR. This would build on the substantial work done at an international 

level to ensure a consistently strong level of regulation of global derivatives markets, enabling each jurisdiction to determine independently which other jurisdictions 

it considers equivalent, to ensure there is no dilution in the strength of local regulations. 

Impact of Proposed Exemptive Order on Non-U.S. Persons 

The proposed exemptive order would ‘‘allow non-U.S. SDs and non-U.S. MSPs to 

delay compliance with certain Entity-Level Requirements’’.3 We believe this is appropriate as it will provide time for those firms for whom substituted compliance is possible to make an application to meet CFTC requirements through that route. 

However, the proposed exemptive order only provides limited relief in relation to 

transaction-level requirements. Related to the previous point on the general application of transaction-level requirements to non-U.S. SDs and MSPs, we believe that 

the delays in required compliance in the proposed exemptive order should extend 

to also cover transaction-level requirements for non-U.S. SDs and MSPs. This would 

provide time for the CFTC to undertake determinations of substituted compliance 

before the requirements become binding on firms. 

Substituted Compliance Process 

We broadly support the process outlined in Section V of the proposed cross-border 

guidance for the determination of substituted compliance for an individual jurisdiction. We do however believe there are a number of additional points or changes that 

could be made in the proposed cross-border guidance that would help provide clarity 

to market participants on the process for determining substituted compliance.

• EU entities will be subject to highly harmonised regulation on derivatives 

issues, with the EMIR regime for OTC derivatives clearing, reporting and margining, the Markets in Financial Instruments Directive (soon to be updated) for 

trading-related issues and the Capital Requirements Directive for banking and 

investment firm solvency. It would therefore seem duplicative to require each 

EU entity seeking to benefit from substituted compliance to separately demVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00066 Fmt 6621 Sfmt 6621 I:\DOCS\112-35\77833.TXT BRIAN
63

onstrate the equivalence of these EU rules with Dodd-Frank. In the EU, assessments of equivalence will be undertaken at a jurisdictional level. As far as possible, we believe it would be beneficial, and more efficient, if the CFTC were 

to take a jurisdictional rather than firm-by-firm approach.

• In our view, the guidance could also outline more clearly in what circumstances 

a particular foreign jurisdiction will be acceptable for substituted compliance, 

and where substituted compliance will only be able to be determined for specific 

requirements as opposed to the entire set of CFTC swap requirements.

• As a further point we would encourage you to consider outlining in the guidance 

how the CFTC will make a determination of substituted compliance when regulatory reform in another jurisdiction is underway but not yet complete. For example, it remains unclear whether the CFTC could deem another jurisdiction 

to be acceptable for substituted compliance on the basis that a jurisdiction has 

rules entering shortly into force.

• We also believe it would be beneficial for the guidance to outline the anticipated 

timing of the CFTC’s substituted compliance assessments, so that firms can 

have some certainly around whether there will be a gap between the expiry of 

the exemptive order and the relevant substituted compliance determinations.

• Finally on this point, we would encourage the CFTC to take into consideration 

compliance with relevant international standards in the determination of acceptability for substituted compliance. In general, compliance with relevant 

international standards (such as the CPSS–IOSCO Principles for Financial 

Markets Infrastructure or various reports of IOSCO) should be an important 

factor in determining if a jurisdiction has a regime acceptable for substituted 

compliance. 

Treatment of U.S. Branches of Non-U.S. Persons 

We are concerned there is a lack of clarity about the treatment of U.S. branches 

of non-U.S. persons in the proposed cross-border guidance. 

Section II.D.3 of the proposed cross-border guidance suggests that, in certain circumstances, a U.S. branch of a non-U.S. person could be required to register with 

and be subject to oversight by the CFTC. We are particularly concerned that a nonU.S. person, who may trade only with other non-U.S. persons, could become subject 

to CFTC registration and oversight due only to the activities of a U.S. branch of 

the non-U.S. person. 

As an example, it appears under the proposed cross-border guidance that a New 

York branch of a UK bank that is facilitating trades between the UK bank and another non-U.S. bank could result in the New York branch, or the UK bank itself, 

being required to register with the CFTC despite the legal person being located outside the U.S. and trading only with non-U.S. persons. We believe in this scenario 

that the transaction entered into by the non-U.S. person through a U.S. branch is 

unlikely to introduce any risk into the U.S. 

We therefore believe the guidance could be clarified to make clear that the presence of a branch in the U.S. should not, in itself, result in the branch or parent 

entity becoming subject to CFTC registration and prudential requirements, unless 

they are required to do so on some other basis. 

Definition of a U.S. Person 

We understand the CFTC’s desire to avoid a situation where the U.S. financial 

system is exposed to undue risks through links to a foreign entity. However, defining an entity which is not resident or established in the U.S. as a U.S. person comes 

with a risk of conflict of laws, particularly where that person is resident or established in a jurisdiction with a highly developed regulatory system. For example, a 

collective investment vehicle managed from the EU, but with a majority ownership 

by U.S. persons, would be subject to the Alternative Investment Fund Managers Directive and EMIR in the EU and to Dodd-Frank in the U.S., and the multiple registration requirements could present a significant possibility of conflict of laws. We 

would encourage a qualification to be added to the definition of U.S. person to state 

that an entity which is neither established nor resident in the U.S. will not be 

classed as a U.S. person where it is established or resident in a jurisdiction which 

has in force regulations with equivalent effect to Dodd-Frank. 

We thank you again for providing the opportunity to comment on these important 

releases, and we look forward to continued strong engagement between the CFTC 

64

and the FSA. We would be happy to discuss any of these issues raised with you further. 

Yours sincerely,

DAVID LAWTON, Director of Markets, Financial Services Authority;

STEPHEN BLAND, Director of Investment Banks and Overseas Banks, Financial Services Authority. 

27 August 2012

Hon. GARY GENSLER, Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

Dear Gary,

1. We appreciate an opportunity to comment on the Commodity Futures Trading 

Commission (‘‘CFTC’’)’s draft interpretative guidance on the ‘‘Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act’’ (the ‘‘Proposed 

Guidance’’) in July 2012. We are writing to express our concerns and to seek clarification on various aspects of the Proposed Guidance as raised by our regulators and 

the industry. 

2. The Proposed Guidance indicates that the CFTC intends to regard non-U.S. 

persons as being subject to the CFTC registration requirements under certain conditions. We are concerned that such an approach to extend the CFTC’s jurisdiction 

to the operation of foreign financial institutions would result in such institutions 

having to meet overlapping, and possibly conflicting, regulations in the U.S. and 

their home jurisdictions, and would undermine regulatory reform efforts currently 

under way in other jurisdictions including Hong Kong. Moreover, the proposed extension of the CFTC’s jurisdictional reach would increase compliance costs for global 

market participants and more importantly, may discourage market participants 

from entering into Over-the-counter (‘‘OTC’’) derivatives transactions with U.S. persons, resulting in market fragmentation and liquidity withdrawal. Particularly for 

those provisions that may be in conflict with local legislation, enforceability is called 

into question. 

Defining ‘‘U.S. Persons’’

3. Regulators in Hong Kong, the Securities and Futures Commission (‘‘SFC’’) and 

the Hong Kong Monetary Authority (‘‘HKMA’’), have examined the Proposed Guidance with market participants operating in Hong Kong with the view to assessing 

the impact that such guidance may have on them and their operations here. The 

general feedback is that there is insufficient clarity as to how the U.S. rules and 

regulations will be applied to non-U.S. based swap dealers (‘‘SDs’’) and non-U.S. 

major swap participants (‘‘MSPs’’), leading to concerns about the practical implementation issues arising from the Proposed Guidance. A major area of concern is 

how the term ‘‘U.S. person’’ will be construed. As you will agree, it is critical for 

a non-U.S. person to be able to independently determine if it falls within the registration requirements of the CFTC rules. As we understand it, this hinges on 

whether the non-U.S. person’s counterparty is a ‘‘U.S. person’’. In this regard, our 

market participants are concerned that the Proposed Guidance does not provide sufficient clarity or specificity to enable them to ascertain whether their counterparties 

will be construed by the CFTC as U.S. persons. Consequently, it is also difficult for 

them to assess the full impact of the registration requirements on them and their 

operations. This also hampers the ability of global players in the OTC derivatives 

market to streamline their structure and operations when dealing with both U.S. 

and non-U.S. counterparties. 

Enforceability Issues 

4. Besides, financial institutions registered as non-U.S. based SDs are required to 

report all OTC derivatives transactions to a Swap Data Repository (‘‘SDR’’). Market 

participants are concerned about whether they could legally transfer customer data 

to the foreign SDRs to meet CFTC’s reporting requirements, given that the client 

account opening documents are governed by the local laws and in the context of fulVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00068 Fmt 6621 Sfmt 6621 I:\DOCS\112-35\77833.TXT BRIAN

11235007.eps 11235008.eps
65

filling the reporting obligations, the U.S. authorities are neither the banks’ home 

or host regulators. Therefore, for the avoidance of legal risk, non-U.S. based SDs 

may be unable to continue dealing with non-U.S. customers in the OTC derivatives 

market unless these customers provide explicit consent to release their data to meet 

the U.S. reporting requirements or substituted compliance is permitted. This places 

them at competitive disadvantage versus peers which are not subject to the same 

restriction. 

‘‘Substituted Compliance’’

5. The Proposed Guidance indicates that the CFTC will allow for ‘‘substituted 

compliance’’, i.e., compliance with local laws and regulations will be regarded as sufficient if such laws and regulations are comparable to U.S. rules and regulations. 

In the extreme cases, such requirements may force financial institutions to refrain 

from certain OTC derivatives activities, thus hampering liquidity in the global markets. However, it isn’t clear how the CFTC will assess comparability for the purposes of allowing ‘‘substituted compliance’’, making it rather difficult for market participants and foreign regulators to understand how comparability will be applied in 

practice. 

Regulatory Cooperation on Cross-Border Transactions 

6. We believe the international community should work together to build a cooperative framework for the regulation of OTC derivatives market on the global basis. 

As the OTC derivatives market is a global one, it is important that regulators adopt 

comparable rules based on guidance and standards set by international standard 

setting bodies. International standards and principles serve to harmonise regulatory 

standards and minimise regulatory arbitrage, while also respecting jurisdictional 

authority. Regulators in major markets have been working together through international standard setting bodies (such as the International Organisation of Securities Commissions and the Committee on Payment and Settlement Systems of the 

Bank for International Settlements) to agree on common standards and principles 

for regulating the OTC derivatives market. Reform efforts in individual markets, including Hong Kong, have also been progressing by reference to these international 

standards and principles. 

7. As foreign jurisdictions would have primary responsibilities in developing and 

implementing the regulatory frameworks for the OTC derivatives market participants and their transactions in their own jurisdictions. To avoid regulatory overlap 

and in the spirit of international comity, we propose that foreign jurisdictions be responsible for the regulation of OTC derivatives activities in their home jurisdictions 

in accordance to international standards. Under this framework, the application of 

the CFTC’s rules to non-U.S. persons, e.g., foreign banks, should only be confined 

to their legal entities based in the U.S. (i.e., U.S. branch or subsidiary). In this connection, we would like to request the CFTC to reconsider the need and the implication of the extraterritorial application of the U.S. derivative regulations, including 

swap dealer registration requirement for non-U.S. persons (including Hong Kong financial institutions). 

8. We understand and appreciate CFTC’s concerns over the activities of U.S. persons and their overseas branches and subsidiaries conducted outside the U.S. that 

may have a significant connection and impact on the U.S. markets and thus giving 

rise to CFTC’s proposal for cross-border application of their regulations. We should 

continue to explore how foreign subsidiaries of U.S. entities could meet the CFTC’s 

rules on swap without coming into conflict with local regulations. Before international consensus is reached on this important matter, we would like to propose 

that CFTC defers application of its regulation with respect to non-U.S. person so 

that regulators in international forum could work out the arrangement for regulating cross-border OTC transactions in a coordinated manner. 

Central Clearing of OTC Derivatives 

9. Furthermore, under the Proposed Guidance, non-U.S. based SDs in order to 

comply with CFTC requirements, will be compelled to clear their OTC derivatives 

transactions through a U.S. regulated central counterparty (‘‘CCP’’) in certain cases. 

Specifically, non-U.S. based SDs who transact with U.S. counterparties, or 

counterparties guaranteed by U.S. persons, will have to clear their OTC derivatives 

transaction through a CCP that is either registered in the U.S. as a Derivatives 

Clearing Organization (‘‘DCO’’), or exempted from having to be registered as a DCO. 

This requirement has significant implications because it means non-U.S. based SDs 

who want to clear through their local (non-U.S.) CCPs, some of which provide service for unique local products, could do so only if such CCPs would have been registered (or exempted from being registered) as DCOs before the implementation of 

the clearing obligations under the Dodd-Frank Act. If the CCPs fail to obtain such 

66

registration or exemption status in good time, there will be significant disruption 

to the global OTC derivatives market. For example, many market participants will 

need to establish in short time new clearing arrangements with CCPs which are 

U.S.-regulated DCOs, or already registered as such. Otherwise, they may have no 

choice but stop transacting with U.S. persons at all to avoid risking non-compliance. 

Either way, the consequences for market participants will be significant. 

10. It is believed that the above unintended and undesirable consequences can be 

avoided or minimised. In this regard, I urge the U.S. authorities to consider the following:

i. Transitional arrangement. Allow OTC derivatives transactions conducted 

outside the U.S. to carry on as usual during the processing period for a DCO 

application or a ‘‘substituted compliance’’ application;

ii. Exempting foreign CCPs. Provide exemption from the DCO registration if 

a foreign CCP is not systemically important to the U.S. market. For example, 

a de minimis exemption could be provided (similar to the de minimis threshold 

for the SD registration) such that foreign CCPs that clear OTC derivatives 

transactions for U.S. persons below a certain threshold, may be exempted from 

the DCO registration; and

iii. Recognising foreign CCPs. Develop a simplified process for recognising 

foreign CCPs that are regulated by competent authorities subscribing to international standards.

11. In conclusion, we call for greater coordination internationally on implementation of OTC regulations, particularly those with cross-border implications. We hope 

that the CFTC, SEC and the U.S. Treasury will defer the application of the U.S. 

rules and regulations over non-U.S. persons and work with the international community on a coordinated framework on regulatory cooperation in cross-border OTC 

transactions. We also hope that U.S. authorities would provide greater clarity to the 

Proposed Guidance and to recognize the OTC derivatives regulatory regimes of overseas jurisdictions on the basis of international standard. 

Yours sincerely,

Professor K.C. CHAN, Secretary for Financial Services and the Treasury.

CC:

Secretary of the Treasury, USA, (Mr. Timothy Geithner) 

Chairman, U.S. Securities and Exchange Commission (Ms. Mary L. Schapiro) 

Consul General of the United States of America in Hong Kong (Mr. Stephen 

Young) 

Chief Executive, Hong Kong Monetary Authority (Mr. Norman Chan) 

Chief Executive Officer, Securities and Futures Commission (Mr. Ashley Alder) 

Hong Kong Commissioner for Economic and Trade Affairs, USA (Mr. Donald 

Tong) 

27 August 2012

Hon. GARY GENSLER, Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

CFTC’s Proposed Guidance on Cross-Border Application of Certain Swap 

Provisions of Commodity Exchange Act (‘‘Proposed Guidance’’)

Dear Chairman Gensler,

1. We, the undersigned, are a group of financial regulators in the Asia Pacific region with a mutual interest in ensuring the smooth and effective implementation 

of the G20-agreed reforms of OTC derivatives markets in our jurisdictions. We welcome the release of the Proposed Guidance by the CFTC to clarify how it intends 

to apply the Commodity Exchange Act to cross-border swap dealing activities involving non-U.S. persons, and acknowledge the CFTC’s efforts to consider the impact 

of the swap provisions on non-U.S. markets and participants. However, we are concerned that some of the proposed requirements as they currently stand may have 

significant effects on financial markets and institutions outside of the U.S. We believe a failure to address these concerns could have unintended consequences, including increasing market fragmentation and, potentially, systemic risk in these 


11235001.eps
67

markets, as well as unduly increasing the compliance burden on industry and regulators. We therefore think it necessary to share with you our specific concerns, as 

well as some suggestions to mitigate these concerns, so that any unintended and 

adverse consequences for global markets and institutions can be averted. 

Major Issues and Suggestions 

2. Currently, various national authorities around the globe (including those represented in this letter) are taking active steps to implement in their jurisdictions 

the reform measures endorsed by the G20 leaders in respect of OTC derivatives 

markets, with a view to promoting transparency and confidence in derivatives markets and reducing systemic risks arising from activities in such markets. 

3. However, the CFTC Proposed Guidance, that subjects non-U.S. persons to the 

swap dealer (‘‘SD’’) or major swap participant (‘‘MSP’’) registration requirements as 

well as entity-level and transaction-level requirements, may have the following consequences:

• Affected non-U.S. persons will have to comply with two sets of regulations, 

which may be overlapping and conflicting, imposed by the U.S. and individual 

non-U.S. regimes. This is compounded by the lack of clarity and specificity in 

a number of areas of the Proposed Guidance.

• Potential market disruption or fragmentation, with consequently increased risks 

to systemic stability and market liquidity in our markets, may arise as market 

participants may have to change their business models or even withdraw from 

certain businesses, all within a relatively short period of time. The impact from 

any resulting (likely significant) increase in compliance costs and the potential 

reduction in liquidity of OTC derivatives markets should not be under-estimated.

4. In our view, while the approach proposed by the CFTC is a useful first step, 

further changes are needed to the Proposed Guidance to achieve an internationally 

harmonised approach and avoid creating frictions in the international market place, 

given the cross-border nature of OTC derivative markets and the concerns expressed 

in this letter and also by other regulators. 

5. We would thus urge the CFTC to consider the following suggestions:

(i) Re-assess scope and timing for implementing the Proposed Guidance:

We suggest that a re-assessment of the CFTC’s proposed approach should be 

made to avoid any unintended and adverse implications for global markets and 

institutions. This should preferably be done together with engagement with affected jurisdictions (including ourselves) to address their concerns before 

finalising the Proposed Guidance. We seek further dialogue with the CFTC to 

do so. Consideration should also be given to deferring the application of the relevant requirements until there is international consensus on how such crossborder transactions should be regulated.

Rather than a rule-by-rule or case-by-case approach as it is currently proposed, an approach that looks at substantive regulatory outcomes (where appropriate) or an expansion to place greater reliance on the regulatory and supervisory regimes of other regulators would better achieve the concept of international comity which the CFTC is seeking.

(ii) Provide more guidance and clarity on assessment of substituted compliance and definition of U.S. person: Notwithstanding the suggestions in 

Paragraph 5(i), we believe the Proposed Guidance would benefit from greater 

clarity and detail regarding the application of the swap provisions. In particular, (a) the definition of ‘‘U.S. person’’; and (b) the criteria, procedures and 

implementation timeline for ‘‘substituted compliance’’ in respect of each of the 

CFTC’s entity-level requirements and transaction-level requirements could each 

be further clarified. We would welcome dialogue with the CFTC on these areas.

We note that the proposed definition of ‘‘U.S. person’’ is high-level and different from that used in other regulations (e.g., Reg S.). Market practitioners 

have also highlighted that it is not easy to identify if a counterparty is a U.S. 

person. Uncertainty will increase the risk for, and costs of, market participants 

in assessing the full impact of the Proposed Guidance (e.g., the registration requirements).

On substituted compliance, the Proposed Guidance contains broad language 

to the effect that the CFTC would determine comparability for the purposes of 

68

1 Considerations include (i) the ‘‘scope and objectives’’ of the regulatory requirements imposed 

by a non-U.S. regulator; (ii) the comprehensiveness of the regulator’s supervisory compliance 

programme; and (iii) the regulator’s power to support and enforce its oversight of non-U.S. SDs 

and MSPs operating in its jurisdiction. 

‘‘substituted compliance’’.1 However, it is unclear on how comparability will be 

assessed and whether there will be interim measures prior to finalising the assessment as no further details or elaboration are provided in the Proposed 

Guidance. 

We are of the view that one useful point of reference for substituted compliance assessment would be the foreign regime’s compliance with applicable global standards set by international standard-setting bodies like the CPSS, IOSCO 

and the Basel Committee on Banking Supervision. Moreover, just as the CFTC 

has proposed requirements which are tailored to the U.S. market, there is also 

a need for other regulators to cater for special characteristics of their local markets. For example, in the case of Hong Kong, Australia and Singapore, we are 

studying whether local market liquidity can justify implementation of mandatory trading of OTC derivatives products on exchanges or electronic trading 

platforms, and the form of trading venue which will best suit the purpose of 

improving pre-trade price transparency. This will affect our timing for implementing mandatory trading in practice (although the powers for imposing such 

trading obligation will be in place). In addition, the CFTC has recognised that 

the pace of implementation of OTC derivatives reforms by different jurisdictions 

may vary, and we suggest that the approval for ‘‘substituted compliance’’ should 

take into account, among other things, the proposed regulations, and the 

progress in introducing these regulations, in ‘‘potentially comparable’’ jurisdictions.

(iii) Allow transitional arrangements for application of Proposed Guidance to non-U.S. entities: To minimise the risk of market disruption and fragmentation in respect of the conduct of OTC derivatives transactions outside the 

U.S. that will likely be captured under the Proposed Guidance, we strongly recommend the CFTC to consider more flexible transitional arrangements that will 

allow market participants to carry on such transactions as usual as it reviews 

jurisdictions for the purpose of ‘‘substituted compliance’’, in line with the spirit 

of international comity.

(iv) Consider further temporary exemptive relief for non-U.S. SDs and 

MSPs: We note that certain requirements, e.g., capital and margin rules, the 

SEF rules, may not be finalised before the swap dealer registration deadline. 

It is thus strange for non U.S.-based entities to register without having certainty on the full implications of the registration.

In addition, certain SD requirements may conflict with domestic requirements. For example, non-U.S. SDs that are regulated as banks may be prohibited by local privacy laws from transferring customer data to the U.S. for reporting swap transactions. To avoid legal risk, non-U.S. SDs may be unable to 

continue dealing with non-U.S. customers in the OTC derivatives market unless 

(a) their customers provide explicit consent to the release of their data in order 

to meet the U.S. reporting requirements; or (b) ‘‘substituted compliance’’ is permitted. 

As such, we request that the CFTC considers delaying the registration requirement for non-U.S. SDs until there is clarity of the above issues. 

Furthermore, we have two comments with respect to the proposed granting 

of temporary exemptive relief order, to allow non-U.S. SDs and MSPs to delay 

compliance with certain entity-level and transaction-level requirements. First, 

we suggest that the ‘‘non-affiliate’’ condition is removed or modified as it will 

capture foreign affiliates that operate independently from the U.S. SD (and are 

not under the SD’s majority control) and whose swaps with non-U.S. 

counterparties are unlikely to have significant systemic risk implications for the 

U.S. Second, while we appreciate the intent of this temporary relief, it is subject 

to progress made on operationalising ‘‘substituted compliance’’ as well as more 

clarity on the conditions to which the relief is subject.

(v) Consider proportional regulatory approach to central counterparties 

(‘‘CCPs’’) in non-U.S. jurisdictions with relatively small OTC derivatives 

markets: We would strongly encourage the U.S. authorities to develop a simplified and pragmatic process for (a) recognising or exempting non-U.S. CCPs 

(including those that operate in relatively small OTC derivatives markets) that 

are regulated by competent authorities subscribing to relevant CPSS/IOSCO 

standards; and (b) handling applications for ‘‘substituted compliance’’ with priVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00072 Fmt 6621 Sfmt 6621 I:\DOCS\112-35\77833.TXT BRIAN
69

ority (provided that clear guidance on application criteria and procedures is 

available to potential applicants). In formulating this process, the CFTC is also 

requested to have regard to the potential impact on non-U.S. CCPs and markets 

as explained below.

Under the Proposed Guidance, non-U.S. SDs, which may be significant liquidity providers in foreign jurisdictions, will be required to centrally clear their 

OTC derivatives transactions with (a) U.S. counterparties or (b) non-U.S. 

counterparties that are guaranteed by U.S. persons (although ‘‘substituted compliance’’ may be permitted for transactions described in (ii)) through registered 

or registration-exempted Derivatives Clearing Organisations (‘‘DCOs’’). If the 

CFTC mandates clearing for products that are also traded in our markets, it 

will be critical that CCPs operating in those markets be able to obtain approval 

from the CFTC as a registered DCO (or be exempted from registration) in good 

time, to allow participants to clear mandated transactions. 

Failure of a CCP to obtain approval as a registered DCO (or be exempted 

from registration) in time may lead to the following consequences:

• The mandated transactions may be channelled to registered DCOs which are 

now global facilities. This raises concerns over the potential over-concentration of risks in such CCPs.

• Certain U.S. SDs operating in the Asia Pacific region are major liquidity providers in local markets. If they are not allowed to use clearing platforms other 

than DCOs that are U.S.-registered or exempt from registration, and other 

smaller local/regional players can only access central clearing indirectly, the 

overall capacity of these players to further provide liquidity in local/regional 

OTC derivatives markets may be curtailed.

• This development may also undermine the financial viability of local/regional 

CCPs, in turn resulting in such CCPs ceasing to provide important clearing 

services for products that are unique to our financial markets and not cleared 

through foreign CCPs registered as DCOs, potentially increasing systemic 

risk in such markets and impacting the stability of U.S. markets and/or major 

participants as well.

• Lastly, local and regional market participants who do not have direct access 

to global CCPs may have to face the credit risk of a small group of clearing 

agents who are likely to be the same global dealers with whom they are dealing, potentially restricting their counterparty risk management capacity. This 

also adds to, and further concentrates, the risks at the major clearing members.

6. We appreciate the opportunity to provide our comments to the Proposed Guidance and look forward to our continued cooperation and engagement with the CFTC 

and other regulators to provide globally harmonised regulations for an efficient and 

robust OTC derivatives market. 

Yours sincerely,

BELINDA GIBSON, ARTHUR YUEN, TEO SWEE LIAN, 

Deputy Chairman, Deputy Chief Executive, Deputy Managing Director, 

Australian Securities and Hong Kong Monetary (Financial Supervision), 

Investments Commission; Authority; Monetary Authority of Singapore; 

MALCOLM EDEY, KEITH LUI, 

Assistant Governor Executive Director 

(Financial System), Supervision of Markets, 

Reserve Bank of Australia; Securities and Futures Commission, Hong Kong. 

27 August 2012


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Hon. GARY GENSLER,

Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

Ref: Answer to the Proposed Interpretative Guidance and Policy Statement 

on Cross-Border application of Certain Swaps provisions of the Commodity Exchange Act—RIN number 3038–AD57

Dear Gary,

On 12 July 2012, the Commodity Futures Trading Commission (CFTC) published 

a proposed interpretative guidance and policy statement regarding the Cross-Border 

application of Certain Swaps provisions of the Commodity Exchange Act. 

This consultation is of particular relevance to ESMA which is tasked with drafting 

technical standards under EMIR, including determining derivative contracts that 

are considered to have a direct, substantial and foreseeable effect within the European Union, as well as assisting the European Commission in its own task of adopting decisions on equivalence of the legal, supervisory and enforcement framework 

in third countries. We have maintained an open and fruitful dialogue with the 

CFTC in the past on these matters and we will continue to do so, in the interest 

of regulatory convergence at international level. 

In a market which is global in nature, it is particularly important that regulations 

in the different jurisdictions converge. Convergence and, consequently, avoidance of 

gaps and overlaps, will contribute to a safe and efficient global derivatives market. 

In order to prevent overlaps, it is important that regulators in different jurisdictions rely on each other especially when an equivalent regulation is implemented 

in the relevant jurisdiction. Indeed it is of paramount importance to strictly limit, 

if not eliminate, any overlap that could jeopardise both safety and efficiency of the 

derivatives market and that could negatively impact on the implementation of the 

G20 commitments. 

We would like to comment as follows: 

U.S. Person and Registration 

The proposed interpretation of the scope of what has a ‘‘direct and significant connection with activities in, or effect on, commerce of the United States’’ is broad. 

The CFTC proposes that non-U.S. persons who engage in more than a de minimis

level of swap dealing with a U.S. person are required to register as a swap dealer 

(SD). In addition, non-U.S. persons who hold swap positions above the Major Swap 

Participants (MSP) specified thresholds with a U.S. counterparty are required to 

register as MSP. 

In practice, this would mean that European entities (whether or not affiliates or 

subsidiaries of U.S. entities) would be subject to CFTC registration requirements if 

they enter into transactions (above the SD or MSP thresholds) with U.S. persons. 

This means that these European entities will be subject at the same time to DoddFrank and EMIR requirements. 

We believe that the scope of the derivative transactions to be considered for the 

purpose of determining the registration requirement of SD or MSP should be limited 

to relevant transactions and to those other activities which could be carried out with 

the purpose of circumventing any relevant obligation. Indeed, it would be appropriate to consider that only transactions that might result in a significant exposure 

for a U.S. person should be deemed to have a direct and significant impact in the 

U.S. 

Far-reaching entity level registration requirements imposed on European entities 

as well as a limited scope for substituted compliance (as discussed below), contributes to dual regulatory compliance requirements. This is why we ask the CFTC to 

reconsider the need for European entities to register as SD or MSP to the extent 

they are fully subject to EU legislation on OTC derivatives. 

In addition, CFTC registration requirements would apply to European entities irrespective of whether they would solicit the counterparty in the U.S. or whether the 

transaction would be concluded at the initiative of the U.S. person. Moreover, in the 

case of U.S. branches, registration of the European head office is required even 

though the transactions would be legally entered into by the parent entity outside 

the U.S., with no additional risk for the U.S. compared to similar entities operating 

without U.S. branches. 

In Europe, under the MiFID proposal, the EU regime would be applicable to third 

country investment firms only if the latter promote their services or solicit clients 

in the EU. Such regime would not apply in the case of the provision of services by 

the third country investment firm at the exclusive initiative of the EU clients. 

71

Under the MiFID proposal, third country entities would also remain subject to their 

home country legislation if deemed equivalent by the European Commission. 

The broad scope of the definitions of a U.S. person, SD and MSP, and the resulting registration requirements could have a serious impact on the current business 

model of European and U.S. firms which may not be proportionate to the benefits 

being sought. Alternative approaches should be envisaged to ensure that the objectives of U.S. regulations are satisfied. 

Substituted Compliance 

We appreciate the introduction of the concept of substituted compliance in the 

CFTC’s proposal. However, we see two limitations in the concept, apart from its application (commented below):

• We have always been of the view that when equivalence or substituted compliance is granted for an entire jurisdiction, registration of entities located in that 

jurisdiction, including affiliates or subsidiaries of U.S. entities, should not be required. However, in the U.S. proposed regime, registration is a pre-requisite before substituted compliance could apply.

• We believe that the proposed use of substituted compliance is still very limited. 

It would apply on a chapter by chapter basis, and in some instances, on a case 

by case basis. It would also only apply to transactions between non-U.S. persons 

and not to cross-border transactions. If applied in this form, such an approach 

would be far away from the concepts of equivalence, mutual recognition and 

avoidance of duplicative or conflicting rules included in EMIR.

We understand that substituted compliance would apply for entity level requirements on a firm by firm basis but with provisions for applications by groups or by 

whole jurisdictions. It is important to note that EMIR is a regulation directly applicable in the 27 EU Members States. This will also be the case for the technical 

standards developed by ESMA that will take the form of a European Commission 

Regulation. Other entity-level requirements have already been introduced in Europe 

through either MiFID or the Capital Requirements Directive (CRD). Under this EU 

regime, firms established in European countries will apply these rules without any 

option to apply different rules. Because there is one set of rules that applies across 

the EU, and in order to facilitate the assessment and to limit the burden on European firms, substituted compliance should apply to all EU firms rather than at firm 

specific level. This is also the case for ensuring a consistent application of enforcement and supervision across EU firms. In this respect, there are several ESMA 

mechanisms to ensure that supervision and enforcement are convergent and comparable across the EU. Against this background, the European approach on equivalence is based on an overall assessment of the regulatory and supervisory regime 

in a particular jurisdiction and we encourage the CFTC to adopt a similar approach 

for substituted compliance for the entire EU. 

Concerning the application of substituted compliance to transaction level requirements, we believe that its application is too narrow. We understand that substituted 

compliance would apply to transactions between two non-U.S. counterparties but, 

for cross-border transactions (e.g., between a U.S. and a European counterparty) 

substituted compliance is not allowed. This would mean that both the European and 

U.S. regulations would apply to a transaction. We believe it would be essential to 

consider the application of substituted compliance for transactions between European and U.S. firms. 

Under Article 13 of EMIR, the European Commission, assisted by ESMA, will 

monitor the international application of requirements for OTC derivatives in particular with regard to potential, duplicative or conflicting requirements. In addition, 

the European Commission may take an equivalence decision to allow for the application of an equivalent third country regime for transactions between European and 

third country firms. Therefore, in order to allow for an equivalence decision and 

positive monitoring, it is important that the third country rules do not duplicate or 

conflict with the European regime. We urge the CFTC to extend the scope of substituted compliance to ensure a smooth adoption of a mutual recognition approach, 

to avoid an unacceptable situation for both market participants and regulators. 

In addition to Article 13 of EMIR, ESMA (under Articles 4 and 11) has to draft 

regulatory technical standards specifying the contracts that are considered to have 

a direct, substantial and foreseeable effect within the Union or the cases where it 

is necessary or appropriate to prevent the evasion of any provisions in EMIR. We 

are working on the development of this draft technical standard. In that context, 

the broad scope of a U.S. person definition and the limited use of substituted compliance might make this work complex in view of the objective to avoid duplications 

72

and potentially conflicting provisions which could have serious consequences for 

both U.S. and European firms. 

We believe that we will succeed in building a sound and coherent global framework leading to improved transparency, efficiency and robustness of the OTC derivatives market, in accordance with the G20 commitments. To that end, although 

we welcome the introduction of the concept of substituted compliance, we are convinced that it will not be possible to achieve our common objective without changing 

significantly its scope to a regime where true reliance on the EU regulatory and supervisory regime is achieved. This could be done by expanding the number of cases 

where it can be applied (especially transaction level requirements) and by applying 

it EU-wide, instead of firm by firm or country by country. 

ESMA stands ready to assist the CFTC in assessing the conditions for substituted 

compliance in a EU-wide approach. 

I hope that these comments will help and look forward to continued cooperation 

with the CFTC with the aim to deliver convergent regulation for a safe and efficient 

OTC derivatives market. 

Yours sincerely,

STEVEN MAIJOOR, Chair, European Securities and Markets Authority. 

August 27, 2012

Hon. GARY GENSLER, Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

Re: Proposed CFTC Cross-Border Releases on Swap Regulations

Dear Chairman Gensler,

We would like to share our views and concerns regarding the impacts of crossborder application of certain swaps provisions of the Commodity Exchange Act 

(CEA). as a result of our assessment of the proposed interpretive guidance issued 

by the CFTC. 

(1) Registration as a Swap Dealer or as a Major Swap Participant 

According to preliminary data, some Brazilian financial entities will exceed the 

de minimis threshold and be required to register as swap dealers (SD) or as a major 

swap participants (MSP) and, therefore, to comply with the relevant rules. 

The additional regulatory burden, associated with the CFTC oversight of activities 

already regulated in Brazil, as we have been told, might discourage Brazilian institutions from trading swaps with many active U.S. persons in our market, with potential impact on market liquidity. 

The regulatory overlap might not only make it more difficult for Brazilian authorities to address local market problems or to deal with troubled institutions, but also 

create a burdensome environment in a time of slow global growth. 

(2) Substituted Compliance 

The proposed approach for a substituted compliance mechanism has several limitations. 

Rather than acknowledging the comparability of the foreign regime as a whole, 

applications for substituted compliance must be submitted by any individual firm 

registered as a SD or as a MSP. This approach is likely to impose unnecessary costs 

and burdens on individual firms in complying with the rules under the CEA. Also. 

it remains unclear whether the foreign applicant will be able to dispute any of the 

Commission’s findings in terms of comparability assessments. 

With regard to G20 members, an alternative to the proposed substituted compliance approach would be a CFTC presumption that countries that have implemented 

the G20 commitments have an adequate regulatory regime for the purposes of ‘‘substitute compliance’’ or ‘‘equivalence’’. The various implementation reviews that the 

FSB, IOSCO and other bodies have set up could be used as an input in this process. 

It is worthy to mention that Brazilian rules are stricter and provide more protection to stability than the requirements set forth in other jurisdictions. To mention 

some examples, we could point out the fact that, in Brazil:


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(i) the final beneficial owner is identifiable at all levels of the holding chain, allowing for accurate and up-to-date monitoring of exposures per market participant, on a daily basis; and that

(ii) over 90% of all derivatives are exchange-traded and cleared at a central 

counterparty clearing, providing unparalleled systemic risk mitigation.

Last, the ‘‘transaction-level requirements’’, as we understood, are not eligible for 

substituted compliance. In our opinion, the relevant rules. along with the features 

pertaining to other jurisdictions (such as mandatory central counterparty clearing 

and margin requirements), can lead to inefficient results. In this sense, we find it 

relevant that the particularities of a foreign regime be taken into consideration also 

in relation to the ‘‘transaction-level requirements’’. 

(3) Privacy and Data Protection Issues 

Another area of concern relates to privacy and data protection issues, since substituted compliance relative to Swap Data Repository (SDR) reporting is only permitted if the CFTC is able to access the required information stored in the SDR. 

This approach may conflict with Brazilian bank secrecy rules set out in Law 105 

of 2001. The Market Authority (CVM) has powers to share information protected by 

bank secrecy rules in cases of enforcement, but there are no previous cases of information sharing in cases of market supervision. In this context, Brazilian entities 

may be prevented from providing more detailed information requested by the CFTC. 

Even in the cases of market participants that are exempt from the registration 

as a SD or as a MSP, our concerns relative to bank secrecy rules remain, since SDR 

reporting rules also apply in such cases. 

We thank you for your consideration and should you have any questions concerning the issues we have raised, please do not hesitate to contact us. 

Yours sincerely,

OTAVIO YAZBEK, Chairman, Comissa ̃o de Valores Mobiia ́ rios. 

17 October 2012

Hon. GARY GENSLER,

Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

U.S. Cross Border Swaps Rules

Dear Chairman Gensler,

We, the undersigned, would like to share our concerns with you about the implementation of the current phase of post-crisis regulatory reform, as you reflect on the 

final shape of the CFTC cross-border rules for swaps. 

Faithfully implementing the reforms adopted by the G20 in 2009 in Pittsburgh 

on the clearing and electronic trading of standardised OTC derivatives in a non-discriminatory way remains of the utmost importance. As you know, Europe has adopted legislation on clearing and is in the final stages of negotiation on the trading aspect of the G20 Pittsburgh reforms. In Japan, clearing requirements will be effective 

in November and legislation on trading platforms was recently approved by the 

Diet. While there may be differences in some areas of detail, we believe the U.S., 

the Member States of the EU and Japan are now set to implement these historic 

reforms in a broadly consistent way in our respective jurisdictions. 

This is a significant achievement, capturing the large majority of the global swaps 

market. But as has been continuously stressed by G20 leaders since 2009, domestic 

legislation alone does not fulfil the political aim that was agreed in Pittsburgh and 

reaffirmed in Toronto in 2010. Regulation across the G20 needs to be carefully implemented in a harmonised way that does not risk fragmenting vital global financial 

markets. 

For all its past faults, the derivatives market has allowed financial counterparties 

across the globe to come together to conduct more effective risk management and, 

as a result support economic development. Done properly this should be of benefit 

to all. At a time of highly fragile economic growth, we believe that it is critical to 


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avoid taking steps that risk a withdrawal from global financial markets into inevitably less efficient regional or national markets. 

We of course recognise and understand the need for U.S. and other regulators to 

satisfy themselves on the adequacy of regulation in other jurisdictions. But we 

would urge you before finalising any rules, or enforcing any deadlines, to take the 

time to ensure that U.S. rulemaking works not just domestically but also globally. 

We should collectively adopt cross-border rules consistent with the principle that 

equivalence or substituted compliance with respect to partner jurisdictions, and consequential reliance on the regulation and supervision within those jurisdictions, 

should be used as far as possible to avoid fragmentation of global markets. Specifically, this principle needs to be enshrined in CFTC cross-border rules, so that all 

U.S. persons wherever they are located can transact with non-U.S. entities using a 

proportionate substituted compliance regime. 

We assure you our regulatory authorities stand ready to work closely with you 

to ensure an effective cross-border regime is implemented at the earliest possible 

opportunity and provide you with the necessary information and reassurance regarding our respective regulatory frameworks. 

Yours sincerely,

GEORGE OSBORNE, MICHEL BARNIER, 

Chancellor of the Exchequer, 

European Commission; 

Commissioner for Internal Market and 

Services, 

UK Government; 

IKKO NAKATSUKA, PIERRE MOSCOVICI

Minister of State for Financial Services, Minister of Finance, 

Government of Japan; Government of France. 

SUBMITTED LETTER BY HON. RANDY NEUGEBAUER, A REPRESENTATIVE IN CONGRESS

FROM TEXAS

December 20, 2012

Hon. K. MICHAEL CONAWAY, 

Chairman,

Subcommittee on General Farm Commodities and Risk Management, 

House Committee on Agriculture, 

Washington, D.C.

Dear Chairman Conaway,

Last week, the Subcommittee on General Farm Commodities and Risk Management held a hearing titled ‘‘Dodd-Frank Derivatives Reform: Challenges Facing U.S. 

and International Markets.’’ During the hearing, one of the CFTC witnesses indicated that the CFTC is drafting a new position limits rule and will appeal the D.C. 

District Court’s decision vacating a previous version of the rule. 

I am concerned that the rule fails to distinguish between speculators on the one 

hand and certain broadly diversified, passive index funds on the other. Inappropriately applying position limits to such funds could significantly reduce investor access to commodity markets, shrink market liquidity, impede price discovery, and destabilize the market. 

The potential for such unintended consequences is so significant that the thenChairwoman of the Senate Agriculture Committee, Blanche Lincoln, a primary author of what became Title VII of the Dodd-Frank Act, was compelled to send the 

enclosed letter to the CFTC. This letter constitutes the clearest expression of legislaVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00078 Fmt 6621 Sfmt 6621 I:\DOCS\112-35\77833.TXT BRIAN

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tive history in this area, and I therefore ask that it be made a part of the official 

hearing record. 

Best regards,

Hon. RANDY NEUGEBAUER. 

ATTACHMENT

December 16, 2010

Hon. GARY GENSLER,

Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

Re: CFTC’s Implementation of Position Limits

Dear Chairman Gensler:

I am writing in regard to the expanded powers granted by the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (‘‘Dodd-Frank’’) to the Commodity Futures Trading Commission (‘‘CFTC’’) with respect to position limits. As you know, 

the CFTC is authorized to set aggregate position limits ‘‘as appropriate’’ across all 

markets. In the past, the CFTC has examined position limits as a means of preventing excessive speculation or sudden price fluctuations in the commodities markets. I support this authority. Going forward, I urge the CFTC to continue to keep 

these important twin goals in mind as it considers and initially sets position limits, 

so that investors who are fully collateralized and may pose little or no systemic risk 

are not arbitrarily limited and that we do not negatively impact valuable market 

liquidity. 

I am mindful of the CFTC’s discretion to set aggregate position limits by ‘‘group 

or class of traders.’’ Further, Dodd-Frank encourages the CFTC to consider how position limits may impact particular classes of persons or swaps. As the CFTC seeks 

to implement position limits, I urge the CFTC not to unnecessarily disadvantage 

market participants that invest in diversified and unleveraged commodity indices. 

These investors often serve as an important, fully collateralized source of liquidity. 

At the same time, they are natural counterparties to producers who are seeking to 

reduce their commodity price risk. In this vein, as I have said previously, it is ‘‘my 

expectation that the CFTC will address the soundness of prudential investing by 

pension funds, index funds and other institutional investors in unleveraged indices 

of commodities that may also serve to provide agricultural and other commodity contracts with the necessary liquidity to assist in price discovery and hedging for the 

commercial users of such contracts.’’ 

In addition to enhancing liquidity and facilitating greater price discovery for commercial end-users, diversified, unleveraged index funds are an effective way to diversify their portfolios and hedge against inflation. Unnecessary position limits 

placed on mutual fund investors could limit their investment options, potentially 

substantially reduce market liquidity, and impede price discovery. Such limits might 

also have the unintended consequence of forcing investors to rely on higher-cost 

managers with little experience, insufficient compliance and trade flow infrastructure, and limited risk management capabilities associated with effectively managing 

commodity index risk. 

Such a comprehensive approach to setting position limits would not be contrary 

to the public interest or to the purposes of the Commodity Exchange Act and DoddFrank. In drafting the position limits provision, Congress sought to eliminate excessive speculation and market manipulation while protecting the efficiency of the markets. Consequently, as Chairman of the Senate Committee on Agriculture, Nutrition, and Forestry, I encouraged the CFTC to differentiate between ‘‘trading activity 

that is unleveraged or fully collateralized, solely exchange-traded, fully transparent, 

clearinghouse guaranteed, and poses no systemic risk’’ and highly leveraged swaps 

trading in its implementation of position limits. 

I repeat my request again today. As it contemplates position limits, I encourage 

the CFTC to carefully consider how such limits may impact particular types of investment vehicles and classes of investors. I hope that the CFTC will implement position limits in a manner that protects ordinary investors and ensures that the comVerDate 0ct 09 2002 10:33 Jan 15, 2013 Jkt 041481 PO 00000 Frm 00079 Fmt 6621 Sfmt 6621 I:\DOCS\112-35\77833.TXT BRIAN

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1See Americans for Financial Reform, ‘‘Comment Letter On The Cross-Border Applications of 

Certain Provisions of the Dodd-Frank Act’’, August 27, 2012. Available at http://

ourfinancialsecurity.org/blogs/wp-content/ourfinancialsecurity.org/uploads/2012/08/AFRCFTC-Cross-Border-Comment-letter-8-27-12.pdf. 2 AFR is a coalition of more than 250 national, state, local groups who have come together 

to advocate for reform of the financial sector. Members of the AFR include consumer, civil 

rights, investor, retiree, labor, religious and business groups along with prominent independent 

experts. 

modity markets continue to benefit from the liquidity and price stability provided 

by unleveraged broad-based index investments. 

Sincerely,

Senator BLANCHE L. LINCOLN, Chairman, 

Committee on Agriculture, Nutrition, and Forestry. 

SUBMITTED STATEMENT BY HON. DAVID SCOTT, A REPRESENTATIVE IN CONGRESS

FROM GEORGIA; ON BEHALF OF AMERICANS FOR FINANCIAL REFORM

Today’s hearing deals with the question of the cross-border or extra-territorial application of the Dodd-Frank Act’s derivatives provisions. Americans for Financial 

Reform has previously commented on this issue in detail to the Commodity Futures 

Trading Commission (CFTC).1 However, for the purposes of the hearing AFR would 

like to provide a summary of key points.2

Strong extra-territorial enforcement of derivatives reforms is absolutely central to 

protecting the U.S. economy and U.S. taxpayers from the risks of unregulated derivatives markets. In recent months, large international banks and in some cases 

foreign regulators have opposed effective cross-border application of U.S. derivatives 

regulation. In evaluating this opposition, several key points must be kept in mind:

• The largest global banks can shift derivatives risks and funding between thousands of international subsidiaries at the touch of a computer keyboard. It is 

therefore impossible to effectively regulate derivatives markets without applying rules to transactions conducted through foreign subsidiaries. Without crossborder applicability, there is no effective regulation of derivatives.

• Many non-U.S. jurisdictions, particularly in Europe, lag years behind the 

United States in implementing derivatives protections. Delaying the application 

of derivatives rules until they are completed in every jurisdiction could create 

an open-ended delay of multiple years in regulating U.S. derivatives markets. 

Four years after the financial crisis and 2 years after the passage of the DoddFrank Act, we cannot afford further multi-year delays in effectively regulating 

our financial markets.

• The application of derivatives safeguards to the global operations of U.S. banks 

does not represent a competitive threat to the U.S. economy. Indeed, these safeguards will benefit the economy and taxpayers by preserving financial stability, 

and will reduce incentives for the outsourcing of U.S. jobs to foreign regulatory 

havens. The profits of Wall Street subsidiaries in London or Singapore must not 

be prioritized over the interests of U.S. taxpayers.

None of these points mean that regulators should not take reasonable and responsible steps to accommodate differences in international regulatory regimes. But 

cross-border issues must not become an excuse for disguised deregulation. 

Without Cross-Border Applicability, There is No Effective Derivatives Regulation 

Modern financial markets are inherently global in scope. Profits and losses experienced in overseas affiliates return to affect the parent company and the U.S. economy. 

We have learned this lesson in many crises, most recently in the massive derivatives losses experienced at JP Morgan’s London office, and most painfully in the 

world financial collapse of 2008. Nowhere is the globalization of financial markets 

more evident than in the derivatives market. As CFTC Chair Gary Gensler has stated with respect to the extraterritoriality issue:

‘‘Swaps executed offshore by U.S. financial institutions can send risk straight 

back to our shores. It was true with the London and Cayman Islands affiliates 


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3See Brush, Silla, ‘‘Goldman Sachs Among Banks Lobbying To Exempt Half of Swaps From 

Dodd Frank’’ (http://www.bloomberg.com/news/2012-01-30/goldman-sachs-among-banks-lobbying-to-exempt-half-of-swaps-from-dodd-frank.html), Bloomberg News, January 30, 2012. 4Page 217, Herring, R. and J. Carmassi, ‘‘The Structure of International Financial Conglomerates: Complexity and Its Implications for Systemic Risk,’’ Chapter 8 in the Oxford Handbook 

of Banking, edited by A. Berger, D. Molyneux, and J. Wilson, Oxford University Press, 2010. 5For one of many recent studies documenting this, see e.g., Cetorelli, N. and Goldberg, L., 

‘‘Banking Globalization, Monetary Transmission, and the Lending Channel’’ (http://

www.newyorkfed.org/research/economists/cetorelli/CetorellilGoldberglfinal.pdf), Forthcoming, Journal of Finance. 6Page 225, Herring, R. and J. Carmassi, ‘‘The Structure of International Financial Conglomerates: Complexity and Its Implications for Systemic Risk,’’ Chapter 8 in the Oxford Handbook 

of Banking, edited by A. Berger, D. Molyneux, and J. Wilson, Oxford University Press, 2010.

of AIG, Lehman Brothers, Citigroup and Bear Stearns. A decade earlier, it was 

true, as well, with Long-Term Capital Management. The nature of modern finance is that large financial institutions set up hundreds, if not thousands of 

‘legal entities’ around the globe . . . Many of these far-flung legal entities, however, are still highly connected back to their U.S. affiliates.’’

Chairman Gensler’s statements are confirmed by extensive experience and data. 

Bloomberg News has documented that large Wall Street banks routinely transact 

well over 1⁄2 of their swaps business through foreign subsidiaries.3 Furthermore, 

these large institutions manage their revenues as integrated global entities, making 

little distinction based on the locations of gains and losses. As Professor Richard 

Herring of the Wharton School has stated: 4

‘‘Despite their corporate complexity, LCFIs [Large Complex Financial Institutions] tend to be managed in an integrated fashion along lines of business with 

only minimal regard for legal entities, national borders or functional regulatory 

authorities. Moreover, there are often substantial interconnections among the 

separate entities within the financial group.’’

Exempting derivatives transactions conducted through international subsidiaries 

from Dodd-Frank requirements would make central derivatives reforms unenforceable. U.S. companies could simply route their derivatives transactions through foreign subsidiaries, evading regulation, and then transfer cash flows back to the U.S. 

parent company. Such transfers would be simple for the institutions, because as the 

above quote points out, major Wall Street banks are managed as global entities. It 

is well known and well documented that major banks, like other international corporations, manage liquidity on a global scale and freely move funding across borders 

in response to the needs of various subsidiaries and the home office.5 Revenues from 

global subsidiaries are generally swept back to the central corporate treasury for 

distribution, often on a daily basis. Professor Herring has described how this process 

worked at Lehmann Brothers, and how it complicated attempts at resolution of the 

bank: 6

‘‘But the fundamental problem was that LB [Lehman Brothers] was managed 

as an integrated entity with minimal regard for the legal entities that would 

need to be taken through the bankruptcy process. LBHI [Lehman Brothers 

Holdings, Incorporated] issued the vast majority of unsecured debt and invested 

the funds in most of its regulated and unregulated subsidiaries. This is a common approach to managing a global corporation, designed to facilitate control 

over global operations, while reducing funding, capital and tax costs . . . LBHI 

lent to its operating subsidiaries at the beginning of each day and then swept 

the cash back to LBHI at the end of each day.’’

Exempting any of the subsidiaries of a global bank from derivatives oversight 

could thus effectively allow banks to avoid regulation on any derivatives transactions they chose. This would perpetuate the unregulated derivatives markets that 

were at the heart of the financial crisis, and undermine the core purposes of Title 

VII of the Dodd-Frank Act. The failure to properly enforce derivatives reforms internationally would expose U.S. taxpayers to the risks of a financial crisis triggered 

by unregulated derivatives activities conducted in foreign regulatory havens. 

U.S. Rules Must Not Be Delayed Until The Rest of the World Has Equivalent Rules 

All of the G20 nations have agreed in principle to a similar set of derivatives reforms, including requirements for central clearing, transparency, and exchange trading. In 2009 the G20 nations jointly committed to implementing these reforms by 

78

7See Financial Stability Board, ‘‘Progress of Financial Regulatory Reforms’’ (http://

www.financialstabilityboard.org/publications/rl120420a.pdf), April 16, 2012. 8Stafford, Phillip, ‘‘Europe Dallies on Derivatives Regulation’’ (http://www.ft.com/intl/cms/

s/0/8ff948ec-3e10-11e2-93cb-00144feabdc0.html), Financial Times, December 4, 2012. 

the close of 2012.7 Unfortunately, other countries lag well behind the United States 

in meeting that deadline. The latest reports from Europe are that implementation 

of European Union derivatives rules will be delayed until at least mid-2014.8

The CFTC has already proposed to delay extraterritorial application of many U.S. 

derivatives rules through mid-2013 in order to accommodate the concerns of foreign 

regulators. But creating further open-ended delays in U.S. derivatives rules will 

leave U.S. taxpayers exposed to risks taken in foreign subsidiaries of Wall Street 

banks for many years to come. Over 2 years have passed since the Dodd-Frank Act 

became law, and further delays in implementing derivatives rules are unacceptable. 

The effort to postpone full implementation of U.S. derivatives reforms until some 

indefinite date when other nations complete their rules is just the latest of a set 

of delaying tactics that have been used by large banks to prevent completion of financial reforms. 

Timely Implementation of Derivatives Reforms Is Not a Threat to U.S. Competitiveness 

Some in the financial industry have argued that U.S. implementation of derivatives reforms is a threat to competitiveness. The claim is that foreign entities will 

refuse to engage in derivatives business with the foreign subsidiaries of U.S. banks 

if they know that such transactions will subject them to new requirements such as 

clearing, exchange trading, and capital requirements. In addition, foreign banks in 

Europe and other jurisdictions may refuse to do derivatives transactions with U.S. 

commercial counterparties if this would subject them to registration as a swaps 

dealer in U.S. markets. 

These arguments are deeply misguided, for several reasons. First, they appear to 

prioritize the profits of financial entities located in foreign countries over the creation of U.S. jobs and the stability of the U.S. economy. It would be a grave error 

to expose the U.S. economy to the risk of financial instability simply so that the 

Singapore or London subsidiary of a Wall Street bank can do unregulated derivatives transactions with foreign counterparties. This is especially true since an exemption for foreign subsidiaries would tend to benefit the economy of the foreign 

jurisdiction where those subsidiaries are located at the expense of the United 

States. Likewise, creating exemptions that permit U.S. commercial counterparties to 

perform unregulated derivatives transactions with foreign banks would privilege 

those foreign banks above regulated U.S. institutions. 

Industry arguments also ignore the benefits of global leadership in derivatives reform. As discussed above, the major G20 nations have all agreed to implement derivatives reforms similar to those proposed in the Dodd-Frank Act. While these reforms have been delayed in other nations, in the long term we can expect that they 

will eventually be implemented in most jurisdictions. As the global derivatives market transitions toward greater oversight, ensuring that U.S. companies have a head 

start and greater experience in complying with the rules should eventually result 

in a competitive advantage for U.S. firms. And in the case of any foreign jurisdictions which defy the G20 consensus and refuse to implement derivatives reform, we 

should clearly act to prevent exposure of the U.S. financial system to unregulated 

transactions in these jurisdictions. 

Finally, the argument ignores the potential competitive advantages to be gained 

by improving the stability and reliability of U.S. derivatives markets through new 

reforms. Derivatives reforms require better risk management and greater loss reserves. These changes will mean that U.S. banks will provide more protection and 

stability for derivatives counterparties and customers, which is a competitive advantage. The U.S. financial sector has gained its international reputation due to our 

global leadership in creating stable and transparent markets. Indeed, it was over 

150 years ago that the U.S. pioneered the derivatives clearinghouse. This was a 

major positive innovation in establishing robust and valuable marketplaces for commodities as well as key financial markets. Although permitting regulatory loopholes 

such as extra-territorial exemptions may create short-term profits, in the long run 

the greatest threat to the U.S. competitive edge is a repetition of the deregulation 

that led to the disastrous financial crisis of 2008. 

79

Any ‘Substituted Compliance’ Regime Must Ensure That Foreign Rules Are 

Truly Comparable To U.S. Rules 

The CFTC has indicated that it will permit ‘substituted compliance’ with U.S. derivatives rules. Under substituted compliance, foreign subsidiaries of U.S. banks 

(and in some cases subsidiaries of foreign banks dealing with U.S. persons) will be 

able to satisfy U.S. requirements by complying with the rules in their local jurisdiction. 

The danger raised by substituted compliance is that banks may seek out locations 

where regulation is weak and then attempt to use the inadequate foreign regulations to satisfy U.S. requirements. This means that it is crucial that any substituted 

compliance regime be strictly limited to jurisdictions that have genuinely comparable rules to the U.S. both in nature and in enforcement. Otherwise, we will see 

the emergence of regulatory havens that play a role similar to the role the Cayman 

Islands and other offshore jurisdictions have played as tax havens. Unless it is 

backed up by a real and thorough process to determine genuine comparability between regulatory regimes, substituted compliance is simply a form of disguised deregulation. 

Regulators must maintain a commitment to genuine comparability determination 

using a thorough process that carefully compares both the nature and enforcement 

of rules in foreign jurisdictions to those of the United States. Some in industry have 

called for a ‘principles based’ comparability procedure, where substituted compliance 

is permitted in any jurisdiction that has agreed in principle to oversee derivatives 

markets. Such calls for ‘principle based’ comparability are simply an effort at backdoor deregulation, as they do not ensure that regulations are genuinely equivalent. 

Clearly there can be no substituted compliance until foreign jurisdictions actually 

complete and implement their rules. Foreign rules cannot be substituted for U.S. 

rules where foreign rules do not yet exist. As discussed above, foreign jurisdictions 

lag years behind the U.S. in implementing derivatives rules. The U.S. must therefore be prepared to implement derivatives reforms rapidly and institute any substituted compliance at a later date, once foreign governments have fully implemented their rules. 

ATTACHMENT

Following are the Partners of Americans for Financial Reform 

All the organizations support the overall principles of AFR and are working for 

an accountable, fair and secure financial system. Not all of these organizations work 

on all of the issues covered by the coalition or have signed on to every statement.

A New Way Forward 

AFL–CIO 

AFSCME 

Alliance For Justice 

American Income Life Insurance 

American Sustainable Business Council 

Americans for Democratic Action, Inc 

Americans United for Change 

Campaign for America’s Future 

Campaign Money 

Center for Digital Democracy 

Center for Economic and Policy Research 

Center for Economic Progress 

Center for Media and Democracy 

Center for Responsible Lending 

Center for Justice and Democracy 

Center of Concern 

Change to Win 

Clean Yield Asset Management 

Coastal Enterprises Inc. 

Color of Change 

Common Cause 

Communications Workers of America 

Community Development Transportation Lending Services 

Consumer Action 

Consumer Association Council 

Consumers for Auto Safety and Reliability 

Consumer Federation of America 

Consumer Watchdog 

80

Consumers Union 

Corporation for Enterprise Development 

CREDO Mobile 

CTW Investment Group 

Demos 

Economic Policy Institute 

Essential Action 

Greenlining Institute 

Good Business International 

HNMA Funding Company 

Home Actions 

Housing Counseling Services 

Home Defender’s League 

Information Press 

Institute for Global Communications 

Institute for Policy Studies: Global Economy Project 

International Brotherhood of Teamsters 

Institute of Women’s Policy Research 

Krull & Company 

Laborers’ International Union of North America 

Lake Research Partners 

Lawyers’ Committee for Civil Rights Under Law 

Move On 

NAACP 

NASCAT 

National Association of Consumer Advocates 

National Association of Neighborhoods 

National Community Reinvestment Coalition 

National Consumer Law Center (on behalf of its low-income clients) 

National Consumers League 

National Council of La Raza 

National Fair Housing Alliance 

National Federation of Community Development Credit Unions 

National Housing Resource Center 

National Housing Trust 

National Housing Trust Community Development Fund 

National NeighborWorks Association 

National Nurses United 

National People’s Action 

National Council of Women’s Organizations 

Next Step 

OMB Watch 

OpenTheGovernment.org 

Opportunity Finance Network 

Partners for the Common Good 

PICO National Network 

Progress Now Action 

Progressive States Network 

Poverty and Race Research Action Council 

Public Citizen 

Sargent Shriver Center on Poverty Law 

SEIU 

State Voices 

Taxpayer’s for Common Sense 

The Association for Housing and Neighborhood Development 

The Fuel Savers Club 

The Leadership Conference on Civil and Human Rights 

The Seminal 

TICAS 

U.S. Public Interest Research Group 

UNITE HERE 

United Food and Commercial Workers 

United States Student Association 

USAction 

Veris Wealth Partners 

Western States Center 

We the People Now 

Woodstock Institute 

81

World Privacy Forum 

UNET 

Union Plus 

Unitarian Universalist for a Just Economic Community 

List of State and Local Affiliates 

Alaska PIRG 

Arizona PIRG 

Arizona Advocacy Network 

Arizonans For Responsible Lending 

Association for Neighborhood and Housing Development NY 

Audubon Partnership for Economic Development LDC, New York NY 

BAC Funding Consortium Inc., Miami FL 

Beech Capital Venture Corporation, Philadelphia PA 

California PIRG 

California Reinvestment Coalition 

Century Housing Corporation, Culver City CA 

CHANGER NY 

Chautauqua Home Rehabilitation and Improvement Corporation (NY) 

Chicago Community Loan Fund, Chicago IL 

Chicago Community Ventures, Chicago IL 

Chicago Consumer Coalition 

Citizen Potawatomi CDC, Shawnee OK 

Colorado PIRG 

Coalition on Homeless Housing in Ohio 

Community Capital Fund, Bridgeport CT 

Community Capital of Maryland, Baltimore MD 

Community Development Financial Institution of the Tohono O’odham Nation, 

Sells AZ 

Community Redevelopment Loan and Investment Fund, Atlanta GA 

Community Reinvestment Association of North Carolina 

Community Resource Group, Fayetteville A 

Connecticut PIRG 

Consumer Assistance Council 

Cooper Square Committee (NYC) 

Cooperative Fund of New England, Wilmington NC 

Corporacion de Desarrollo Economico de Ceiba, Ceiba PR 

Delta Foundation, Inc., Greenville MS 

Economic Opportunity Fund (EOF), Philadelphia PA 

Empire Justice Center NY 

Empowering and Strengthening Ohio’s People (ESOP), Cleveland OH 

Enterprises, Inc., Berea KY 

Fair Housing Contact Service OH 

Federation of Appalachian Housing 

Fitness and Praise Youth Development, Inc., Baton Rouge LA 

Florida Consumer Action Network 

Florida PIRG 

Funding Partners for Housing Solutions, Ft. Collins CO 

Georgia PIRG 

Grow Iowa Foundation, Greenfield IA 

Homewise, Inc., Santa Fe NM 

Idaho Nevada CDFI, Pocatello ID 

Idaho Chapter, National Association of Social Workers 

Illinois PIRG 

Impact Capital, Seattle WA 

Indiana PIRG 

Iowa PIRG 

Iowa Citizens for Community Improvement 

JobStart Chautauqua, Inc., Mayville NY 

La Casa Federal Credit Union, Newark NJ 

Low Income Investment Fund, San Francisco CA 

Long Island Housing Services NY 

MaineStream Finance, Bangor ME 

Maryland PIRG 

Massachusetts Consumers’ Coalition 

MASSPIRG 

Massachusetts Fair Housing Center 

Michigan PIRG 

82

Midland Community Development Corporation, Midland TX 

Midwest Minnesota Community Development Corporation, Detroit Lakes MN 

Mile High Community Loan Fund, Denver CO 

Missouri PIRG 

Mortgage Recovery Service Center of L.A. 

Montana Community Development Corporation, Missoula MT 

Montana PIRG 

Neighborhood Economic Development Advocacy Project 

New Hampshire PIRG 

New Jersey Community Capital, Trenton NJ 

New Jersey Citizen Action 

New Jersey PIRG 

New Mexico PIRG 

New York PIRG 

New York City Aids Housing Network 

New Yorkers for Responsible Lending 

NOAH Community Development Fund, Inc., Boston MA 

Nonprofit Finance Fund, New York NY 

Nonprofits Assistance Fund, Minneapolis M 

North Carolina PIRG 

Northside Community Development Fund, Pittsburgh PA 

Ohio Capital Corporation for Housing, Columbus OH 

Ohio PIRG 

OligarchyUSA 

Oregon State PIRG 

Our Oregon 

PennPIRG 

Piedmont Housing Alliance, Charlottesville VA 

Michigan PIRG 

Rocky Mountain Peace and Justice Center, CO 

Rhode Island PIRG 

Rural Community Assistance Corporation, West Sacramento CA 

Rural Organizing Project OR 

San Francisco Municipal Transportation Authority 

Seattle Economic Development Fund 

Community Capital Development 

TexPIRG 

The Fair Housing Council of Central New York 

The Loan Fund, Albuquerque NM 

Third Reconstruction Institute NC 

Vermont PIRG 

Village Capital Corporation, Cleveland OH 

Virginia Citizens Consumer Council 

Virginia Poverty Law Center 

War on Poverty—Florida 

WashPIRG 

Westchester Residential Opportunities Inc. 

Wigamig Owners Loan Fund, Inc., Lac du Flambeau WI 

WISPIRG 

Small Businesses 

Blu 

Bowden-Gill Environmental 

Community MedPAC 

Diversified Environmental Planning 

Hayden & Craig, PLLC 

Mid City Animal Hospital, Pheonix AZ 

The Holographic Repatterning Institute at Austin 

UNET

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