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CFTC Issues Dodd-Frank Substituted Compliance Rulings

On 20 December 2013, the Commodity Futures Trading Commission (CFTC) approved a series of broad comparability determinations with respect to regulation regarding the central clearing of derivatives enacted in Australia, Canada, the EU, Hong Kong, Japan and Switzerland.  The favourable determinations means that non-US Swap Dealers (SDs) or non-US Major Swap Participants (MSPs) in these jurisdictions can comply with home state regulations as a substitute for compliance with the relevant provisions of the Dodd-Frank Act and associated CFTC regulations.

The CFTC made no determination with respect to CFTC regulation 23.600(c)(2) (which requires an SD or MSP to produce quarterly risk exposure reports and provide such reports to its senior management, governing body, and the CFTC) or CFTC regulation 23.608 (restrictions on counterparty clearing relationships) for any of the above jurisdictions.  In addition, it made no ruling on CFTC regulation 23.609 (clearing member risk management) for Hong Kong and Switzerland.  However, it extended no action relief in the areas until 3 March 2014 (it had originally been due to expire on 21 December 2013).

In a dissenting statement, CFTC Commissioner Scott O’Malia lamented the “narrow rule-by-rule approach that leaves unanswered major regulatory gaps between our regulatory framework and foreign jurisdictions”, observing that it was at odds with the “flexible, outcome-based approach, based on a broad category-by-category” analysis agreed to originally by the OTC Derivatives Regulators Group.  He noted that the CFTC’s approach had meant that it had failed to address or provide any clarity in a number of areas, including the EU’s regulatory data reporting regime.

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