Issues in the extraterritorial application of Dodd–Frank’s derivatives and clearing rules, the impact on global markets and the inevitability of cross-border and US domestic coordination

The derivatives markets have a substantial and extensive cross-border component which raise complex issues with respect to the appropriate regulatory response.The size, extent, and cross-border components of the derivatives markets pose challenges to developing a regulatory framework that will not lead either to regulatory arbitrage or the imposition of unnecessary costs for counterparties (including costs resulting from market fragmentation and reduced business due to regulatory uncertainty and complexity). The CFTC, the main regulatory agency in the United States charged by the Dodd-Frank Act to regulate a substantial portion of the derivatives market including clearing, settling and reporting of transactions, in many cases in conjunction or consultation with other US regulatory agencies, has acted swiftly in proposing and passing legislation, at times far ahead of other agencies and not always in coordination with key European and Asian counterparts. At the same time, regulating activities outside of the US, or extraterritorially, has continued to be a controversial aspect of US financial regulation; while the CFTC continues to insist on broad cross-border regulation as a result of the mandate in Dodd-Frank, it has introduced the concept of substituted compliance to the equation, whereby it can exempt compliance with certain US rules if it deems host country rules sufficiently equivalent to those of the US (the SEC has introduced a similar mechanism). The CFTC has also delayed requirements to comply with certain cross-border rules with the mechanism of no-action letters. International consultation and coordination of various cross-border rules in the registration, trade reporting and clearing context has also become a significant component in the context of cross-border business. There are major issues to address including how can optionality be achieved so that counterparties have cross-border access to CCPs without requiring the CCPs to be registered in more than one market? Dodd-Frank and EMIR vary in many respects and the challenge is to address the home country’s concerns through developing a framework in which it can have confidence in relying on host countries whose rules and oversight differ from its own but where the outcomes are comparable. The authors first addressed these issues in Examining the extraterritorial reach of Dodd-Frank’s Volcker rule and margin rules for uncleared swaps — a call for regulatory coordination and cooperation. However, in light of the many conflicts that have arisen due to new and proposed regulation, in addition to the lively debates and exchanges among regulators with the goals of coordination, they revisit these issues, taking into account new developments at the international level.