Following a flurry of last-minute activity, the Commodity Futures Trading Commission approved new guidelines that allow for greater deference to international swap regulations.

On Friday, by a 3-1 vote, the Commission approved Cross-Border Final Guidance and a Cross-Border Phase-In Exemptive Order. The vote, for now, settles an ongoing dispute between U.S. regulators and their foreign counterparts over how best to regulate the global swaps market. In assessing standards for the marketplace, that debate centered on the degree of influence U.S. regulators should have over derivatives transactions, which typically drift beyond a single national border. Concerns were raised that the CFTC had sought to impose its will over its international colleagues and, in doing so, would create an overlapping, potentially contradictory, and burdensome.

On Jan. 13, 2013, the Commodity Futures Trading Commission issued a final order that granted market participants temporary conditional relief from certain provisions of the Commodity Exchange Act, as amended by the Dodd-Frank Act. That order was set to expire on July 12. With its vote, to phase-in its regulations, the CFTC provided temporary conditional relief effective upon the expiration of the previous order. That relief will expire by Dec. 31, 2013 and the CFTC will decide by the end of the year which international rules are comparable enough to its own to warrant substituted compliance.

Full details of the two votes can be found here and here.

On June 11, Chairman Gary Gensler and European Commissioner Michel Barnier announced a compromise and “Path Forward”  on the contentious matter of deciding who's rules should prevail and when.  The two parties agreed they should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes. The CFTC vote the next day formalizes, to a large extent, what its rules will be, the timeline for implementation, and if and when international trades will need to comply with its regulatory edicts.

During Friday's meeting, Commissioner Mark Wetjen described the challenge of having  a cross-border policy to “protect U.S. taxpayers and the stability of the U.S. financial system,” but that also embraces a substituted-compliance approach and ensures a “level competitive landscape.”

The foreign branches of U.S. banks operating overseas, and other foreign entities benefiting from the credit support of a U.S. firm, will be required to register if they are active dealers in the swap market. “With registration, the public is assured that such entities implement risk-management programs, report their swap activities, abide by capital standards, and manage credit risk in compliance with margin and clearing requirements,” he said.

The guidance brings guaranteed affiliates within the Dodd-Frank regime, Wetjen explained. It also takes the “practical approach” of allowing that non-U.S. affiliate to abide by risk-management practices required by the jurisdiction in which it is located, so long as the commission deems those practices comparable to U.S. law and sufficiently comprehensive. “This approach strikes an appropriate balance between asserting the commission's regulatory interest and recognizing the interests of other regulators,” he said.

“A global regime such as the one now contemplated in the guidance is the best means to avoid balkanization of risk and risk management that would have benefited no one,” he added. “The fragmentation and regionalization of markets... would have exposed the U.S. financial system to risks that are unnecessary, needlessly complex, and difficult to predict and contain.”

Commissioner Scott  O'Malia was the lone dissenting vote (he is the only Republican on the CFTC since the recent departure of Commissioner Jill Sommers). In his remarks, he lamented the need for “last minute negotiations” with the CFTC's European counterparts and the “regulatory train wreck” those discussions barely averted.

“It is my hope that the work lying ahead will be undertaken in a more transparent manner and not done through the abused no-action process that lacks any formal Commission process or rigor,” he said. “I want to work with other home country regulators to ensure there is not an opportunity for entities to exploit regulatory loopholes. The stark reality is that this Commission is not the global regulatory authority and doesn't have the resources to support such a mission. Therefore our best and most effective solution is to engage in a fully transparent discussion on substituted compliance and to do so immediately.”