Published by the Australian Financial Markets Association in AFMA Member News, December 2016.
On 14 September, the US Commodity Futures Trading Commission (CFTC) granted Australian market licence holder Yieldbroker Pty Limited long-term, no-action relief from the swap execution facility (SEF) registration requirement. This made Yieldbroker the first non-US swap trading facility in the world that is allowed to offer direct access to US participants without having to register as a SEF with the CFTC.
As well as the significant benefits to Yieldbroker and the Australian swaps market it supports, this is an important step in cross-border regulatory coordination. This development highlights ASIC's ongoing efforts to support Australian entities seeking regulatory recognition in foreign markets.
US cross-border swaps provisions
In July 2010, the Dodd-Frank Act established a new regulatory framework for swaps in the United States. One key aspect of this framework is the requirement that swaps be traded on SEFs, as a way to enhance transparency in the over-the-counter (OTC) market. The provisions also apply to activities outside the United States as long as those activities have ‘a direct and significant connection’ with the United States. A multilateral swaps trading platform located outside the United States that gives US persons the ability to execute swaps (such as Yieldbroker) would be expected to register as a SEF with the CFTC.
Regulatory recognition of the Australian regime
The market for swaps is global in nature, with significant transactions between counterparties in different jurisdictions (‘cross-border’). Without coordination between jurisdictions, the simultaneous application of each regulator’s requirements to a global market has the potential to lead to conflicts of law, legal uncertainty and, market inefficiencies such as liquidity fragmentation.
To prevent those issues in connection to the Australian market, in May 2015 the CFTC – in coordination with ASIC – issued an enabling no-action letter (CFTC Letter No. 15-29). The letter provides qualifying swaps trading platforms that are licensed and regulated in Australia with long-term, no-action relief from SEF registration requirements. While this relief is open to any Australian-licensed swap trading platform, Yieldbroker has been the first one to benefit.
In turn, ASIC has been adopting a no-action position towards the SEFs operating in Australia since 2013, permitting Australian participants to continue trading with US counterparties without fragmentation of liquidity pools. Earlier this year, the CFTC formally registered the seven SEFs operating in Australia. ASIC is now in the process of inviting applications for professional market exemptions from SEFs that are fully registered and compliant with the SEF requirements under the CFTC's supervision.
Benefits of international regulatory recognition
The relief granted by the CFTC has significant and tangible benefits for Yieldbroker as an Australian market licensee. Yieldbroker has stated that ‘the move secures billions of dollars of trade business and removes commercial uncertainty’; and benefits participants through ‘greater regulatory certainty, lower costs and reduced levels of operational and compliance risk’.
From a regulatory perspective the relief establishes deference by the CFTC to ASIC based, in the words of the CFTC, ‘upon the comparative quality of the respective regulatory regimes’. This aligns to ASIC’s long-term vision of having Australian market infrastructure recognised as a global benchmark for best practice in the field.
ASIC continues to recognise globalisation as a source of opportunity for markets, and of challenge for regulators. Regulators may address cross-border concerns through greater consistency between jurisdictions' laws and regulations. This has occurred through the OTC derivatives reforms and now through the Yieldbroker experience.
In an environment of ever-increasing interconnection, it is important that regulators around the world enhance co-operation in policy, rule-making, licensing, surveillance and enforcement – to help ensure the integrity of markets and promote the trust and confidence of investors.