How does the rest of the world feel about the U.S. Commodity Futures Trading Commission's pending swaps regulations? Summed up in two words: not happy.

As August drew to a close, a flurry of public comments from regulators and industry groups from across the globe were submitted to the CFTC over Dodd-Frank Act mandates that have led to rulemaking that pertains to derivatives trades.

Regulations being developed by the CFTC would require certain foreign entities engaged in U.S. facing swap deals to register under the Dodd-Frank Act's swap dealer registration requirements and abide by rules that include having swaps be guaranteed at clearinghouses.

The CFTC proposed interpretive guidance on June 29 that allows a “substituted compliance” exemption for overseas affiliates of U.S. banks as long as they  are subject to what are deemed to be “comparably robust and comprehensive” rules in that country.  That has not been enough for critics who say the parameters of the exemption are not clearly defined and, making matters worse, will be considered by the CFTC on a case-by-case basis. Another beef emerging from the recent batch of public comments is what they say is an unclear definition of what, exactly, constitutes a “U.S. person,” a cornerstone of the extraterritorial effort.

The Australian Securities and Investments Commission, the Reserve Bank of Australia, the Hong Kong Monetary Authority, the Hong Kong Securities and Futures Commission, and the Monetary Authority of Singapore issued a joint letter that expressed concern the proposed requirements, as they currently stand, may have “unintended consequences” on financial markets and institutions outside of the U.S.

While agreeing with the goal of promoting transparency and confidence in derivatives markets, and reducing systemic risks, they wrote that the CFTC's Proposed Guidance, subjecting non-US persons to the swap dealer (SD) or major swap participant (MSP) registration requirements and entity-level and transaction-level requirements, could have the following consequences:

Affected non-US persons will have to comply with two sets of regulations, which may be overlapping and conflicting. This is compounded by the lack of clarity.

Potential market disruption or fragmentation, with consequently increased risks to systemic stability and market liquidity in their markets, may arise as market participants have to change their business models or even withdraw from certain businesses, all within a relatively short period of time.

The Investment Industry Association of Canada wrote that many of its members are planning to register with the CFTC as swap dealers or major swap participants in order to continue their cross-border swaps operations. Canadian securities regulators are also in the process of establishing new rules and regulations governing swaps transactions.

“The Proposed Guidance, if implemented in its current form, will create unnecessarily burdensome compliance requirements for these IIAC members, since they will also be subject to duplicative Canadian regulations,” the association wrote. “We are also concerned that the proposed approach may serve as a template for future actions by other U.S. financial regulators involving cross-border transactions and will impose unfair barriers to the international community in conducting swaps business with U.S. persons. “

The IIAC added that they do not believe that the location where an entity is organized should be relevant in determining whether it is a “U.S. person.”

“Corporations are incorporated in the United States for a variety of tax, marketing, corporate governance or regulatory reasons that do not necessarily suggest that the United States is the primary or even a principal nexus for the entity's activities,” they wrote, suggesting that U.S. person status be based on the location from which the corporation is centrally managed, or by the location of a majority of its directors or executive officers rather than place of organization.”

Tony Burke, policy director for the Australian Banker's Association, also called the language thus far regarding substituted compliance, as well as some other key issues, “very vague.”

"It is now clear that the compliance date with the swap dealer registration rule will be Oct. 12, 2012, yet the proposed guidance is unlikely to be finalized before the compliance date,” he wrote. “It is imperative that there is clarity on the effect of the final cross-border guidance prior to registration.”

Burke urge the Commission to provide an extension of time for non-U.S. persons to comply with the requirement to register as a swap dealer/major swap participant, at least until after the cross-border guidance is finalized.  Otherwise, “non-U.S. banks will be in the untenable position of having to register as a swap dealer and commence compliance with the rules without clarity or full knowledge of the consequences of doing so.”

The Japanese Bankers Association objected to the proposed guidance framework's imposing registration and compliance with the U.S. rules “based only on the fact that the non-U.S. swap dealer is dealing with U.S. persons.”

Because Japanese swap dealers are required to register in Japan and “are already adequately monitored and supervised by the Japanese regulatory authority, requiring that country's swap dealers to register at the Commission, only on the basis of those transactions,  “will impose duplicative registration and compliance administration, for which the burden is not trivial.”

Among the other international parties writing to the CFTC during the past week, many expressing similar concerns, were: the Swiss Financial Market Supervisory Authority; the French Ministry of Economy and Finance; the Financial Services Authority (UK); the Association for Financial Markets in Europe; the London Metal Exchange; the Korea Federation of Banks; the Association of German Banks; and the European Commission.