On Monday, Better Markets filed a comment letter on the Commodity Futures Trading Commission’s (CFTC) proposed exemption from certain U.S. regulations for certain derivatives clearinghouses organized outside of the United States. Despite the CFTC’s naming convention—”alternative compliance”—the proposal is not a means to comply with U.S. law at all, but rather, an explicit and unlawful exemption from most U.S. regulatory requirements applicable to clearinghouses combined with a de facto and unlawful exemption from most U.S. statutory requirements as well. For this reason, the CFTC’s proposal rightly should have been called, “Alternative Non-Compliance.” Better Markets comment letter can be found here.
The Dodd-Frank Act made central clearing of swaps a cornerstone financial reform for the over-the-counter derivatives markets in the aftermath of the 2008 financial crisis. It sought to reform Wall Street’s reckless practices in the dealer-dominated derivatives markets by mandating and encouraging migration of significant derivatives risks to clearinghouses, making robust, comprehensive supervision and regulation of such clearinghouses, clearing practices, and interconnected clearing members all the more critical to U.S. financial stability. The CFTC should be focused on statutory mandates to ensure the safety and soundness of clearinghouses, to protect U.S. customers and access to the markets, and to maintain the financial stability of the U.S. financial system as whole. Instead, the CFTC seeks an unnecessary exemption that conflicts with agency practice for at least two decades and would dramatically reduce U.S. oversight of five out of the six foreign clearinghouses currently regulated by the CFTC.
Moreover, the CFTC’s proposed “alternative compliance” framework is, unfortunately, only one of three proposals seeking to exempt clearinghouses and other financial institutions from U.S. oversight. Stay tuned for Better Markets’ upcoming comment letter discussing an even more dangerous and equally unlawful CFTC exemption for foreign clearinghouses.