Extraterritoriality of the Dodd-Frank Act: Dealing with New CFTC Regulations

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7 November 2012
Anshuman Jaswal

Abstract

In many leading economies, regulators have drafted regulations to deal with the requirements for better risk management and greater transparency for derivatives products. In the US, the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) have begun implementing derivatives regulations under the Dodd-Frank Act (DFA). These new rules have important implications for non-US firms.

In the report, Extraterritoriality of the Dodd-Frank Act: Dealing with New CFTC Regulations, Celent considers the impact of the implementation of rule-making related to the Dodd-Frank Act on non-US providers. Several factors have to be considered, including the location of the trading entity, the nationality of its counterparties, and applicable regulatory requirements. Foreign firms have to consider which of its entities trade swaps with US persons and under which jurisdictions, as well as overlap in jurisdictions between the US and non-US markets. The implications for potential transactions and future business are another consideration because some firms might choose to restrict their swap trading to keep regulatory costs under control.

Firms that engage in swap-trading with US entities should prepare themselves to comply with the DFA requirements for trade execution, clearing, and real time reporting. Foreign banks and other trading entities have to undertake compliance for processing trades with US entities by the end of 2012. Substituted compliance is allowed for swap data reporting and recordkeeping, as long as the CFTC is provided access to data held at the foreign trade repository.

“The regulatory structure for OTC derivatives has become more stringent following the financial crisis,” says Dr. Anshuman Jaswal, Senior Analyst with Celent’s Securities & Investments Group and author of the report. “For foreign banks and other swap trading entities, the task of identifying all swaps with US counterparties is likely to be one of the main problems with regard to compliance with the new regulations.”

This report begins with an overview that considers important elements of the extraterritorial jurisdiction of US regulators under the Dodd-Frank Act. This is followed by a discussion of the different steps that firms complying with the new regulations have to consider. Finally, the report looks at some of the important issues being raised regarding the cross-border implications of US regulations.

This 22-page report contains one figure and three tables.

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