The US Commodity Futures Trading Commission took another step to easing global derivative market uncertainty in light of UK's exit from the EU by ensuring that certain uncleared swaps would not suddenly face CFTC margin requirements from which they were previously excluded.
An interim final rule, approved unanimously by the commission Monday, would apply only in the event the UK exits the EU without a negotiated withdrawal agreement.
"At a time of heightened market uncertainty caused by Brexit, this commission has worked over the last several weeks to bring clarity to participants in global derivative markets [in] a series of separate actions and statements with its regulatory counterparts in London, Brussels and Singapore," CFTC Chairman Christopher Giancarlo said.
Among those, he mentioned a February statement issued by US and UK regulators on the continuity of crossborder derivatives regulation as well as two forthcoming memoranda of understanding.
SWAP TRANSFERS
Monday's interim final rule avoids a US regulatory deterrent to swaps transfers -- from UK entities to affiliates outside the UK -- that entities may pursue so that swaps can continue to be serviced under European Union law after a hard Brexit.
The CFTC regulation would allow legacy swaps to be transferred from UK entities to an affiliate, wherever it is located, without losing their legacy status under CFTC margin regulation. The legacy status means that US margin rules do not apply because those swaps were entered into before the relevant US compliance deadline.
CFTC Commissioner Dan Berkovitz, a Democrat, said that if the margin rules were to apply to legacy transactions, the increased regulatory costs could impede the transfers, potentially introducing new systemic risks globally.
CFTC staff said the agency was pursuing an interim final rule, rather than a proposal, "given the short time for the Brexit deadline and potential for market disruption."
CONSTRICTED RISK MANAGEMENT
The commission was more divided, voting 3-2 Tuesday, on a final rule to exclude swaps entered into by insured depository institutions in connection with loans from counting toward the threshold of swap dealing that triggers a suite of CFTC regulation.
Giancarlo said the change would enable small commercial borrowers to conduct prudent business risk management that has been constricted under the current rules.
Berkovitz worried the rule change creates a loophole, or "drives a truck" through the de minimis exemption to swap dealer registration by allowing an unlimited amount of swap dealing by an IDI for swaps with only a tenuous connection to a loan. A bank, for instance, could enter a loan with an oil company for construction of a new office building and later enter into an unlimited amount of commodity swaps to hedge the entire company portfolio of exploration, production and sales, he suggested.
These swaps would not count toward the bank's de minimis threshold, he said. "This cannot possibly be the de minimis quantity of swap dealing intended by Congress," he said.
Both he and Commissioner Rostin Behnam worried the approach evaded requirements imposed by Congress that changes to the term "swap dealer" be made only through joint rulings with the Securities and Exchange Commission.
Behnam worried that approach made them more vulnerable to shifting policy winds.
"The uncertainties embodied in the IDI de minimis provision deprive IDIs and their customers the legal certainty and clarity intended by Congress and may result in increased risk for market participants and perhaps contribute to systemic risk," Behnam said.
