US Commodity Futures Trading Commission (CFTC) chairman Gary Gensler has defended elements of the Dodd-Frank Act over perceived extra-territoriality, in his keynote address to the Futures Industry Association's (FIA) annual conference in Boca Raton, Florida.
During the course of his speech, Gensler highlighted the achievements of US regulatory agencies in finalizing and enacting Dodd-Frank reforms over swaps trading, saying that ideas were now becoming a reality. In addressing the need for offshore affiliates of US financial institutions, and foreign institutions operating in the US to comply with Dodd-Frank mandates, he said that previous incidents involving the collapse of firms showed that contagion effects did not respect national boundaries.
"Looking forward, it's a priority that the Commission ensures the cross-border application of swaps market reform appropriately covers the risk of US affiliates operating offshore. During a default, risk knows no geographic border," he said. "If a run starts in one part of a modern financial institution, whether it's here or offshore, the risk comes back to our shores. That was true with AIG, which ran most of its swaps business out of the London neighborhood Mayfair. It was also true at Lehman Brothers, Citigroup, Bear Stearns and Long-Term Capital Management."
Various industry groups have criticized the perceived extra-territorial reach of Dodd-Frank Act requirements, saying that their operations could fall under the purview of US regulators even if their business in the US is minimal. Foreign regulators have also voiced criticism of the approach, and market participants have even said that in order to comply with some Dodd-Frank mandates, they will be forced to break the law in their own country.
Where there are comparable and comprehensive home country rules abroad, we can look to substituted compliance, but the transactions would still be covered.
Gensler said that where appropriate, foreign competent authority regulation would be considered. However, the essence of the argument is that events with the potential to affect US markets should fall under US auspices.
"Thus, as the CFTC completes the cross-border guidance, I believe it's critical that Dodd-Frank swaps reform applies to transactions entered into by branches of US institutions offshore, between guaranteed affiliates offshore, and for hedge funds that are incorporated offshore but operate in the US," he continued. "Where there are comparable and comprehensive home country rules abroad, we can look to substituted compliance, but the transactions would still be covered."
He encouraged foreign firms that would seek to substitute US compliance with that of their home regulator to contact the CFTC immediately.