CFTC Updates Court on New Reporting Policy

     (CN) – The CFTC told a federal judge it is making progress in its analysis of the costs of imposing a reporting obligation for foreign derivative swaps.
     Nearly a year after demanding a cost-benefit analysis on the regulation of cross-border derivative swaps, U.S. District Judge Paul Friedman demanded an update.
     The dispute stems from a policy that the Commodity Futures Trading Commission announced in 2013, after the 2008 financial crisis made clear that the investment decisions of foreign offices had major ramifications for U.S. financial firms.
     In a “cross-border action,” which it described as a policy rather than a binding rule, the agency said major swap dealers must register to clear swaps involving a foreign party through a derivative clearing organization.
     Such registration aims to reduce the risk of default and imposes reporting obligations on swap participants, the commission said.
     The policy states that “where the conduit is located outside the United States, but is owned and controlled by a U.S. person … to recognize the economic reality of the situation, the conduit’s swaps should be attributed to the U.S. affiliate(s).”
     Three trade organizations representing the financial industry, headed by the Securities Industry and Financial Markets Association, challenged the cross-border action with a federal lawsuit, alleging the agency exceeded its authority in applying its regulatory powers overseas.
     Though Friedman sided with the agency in September last year, he did agree with the association and held that the commission did not adequately analyze the costs and benefits of the policy’s extraterritorial applications.
     In a status report Tuesday, the agency told the judge it asked for public comment on what types of costs and benefits may arise from the extraterritorial application of the rule different from the domestic application.
     It said it is “currently in the process of formulating recommendations to assist the Commission’s deliberation with respect to these matters.”
     In addition, the commission issued a notice of proposed rulemaking on August 19 that would amend one of the remanded rules related to reporting requirements for cleared swaps.
     The agency said it was “motivated, in large part, by practical experience with the operation in connection with cleared swap transactions.”

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