US Regulatory Update
Reducing Regulation and Controlling Regulatory Costs
On 30 January, President Donald Trump issued an executive order seeking to reduce and control the number of federal regulations. The executive order will: (i) require federal agencies to identify what existing regulations can be repealed; (ii) require federal agencies to repeal two rules for every new rule that is proposed and adopted, and (iii) set an annual cap on the cost of new federal regulations to ensure that regulations issued for the rest of the fiscal year, offset by repealed regulations, have a net cost of zero dollars. However, in an unpublished statement, the White House indicated that the executive order would not apply to independent federal agencies, such as the Securities and Exchange Commission (SEC) andCommodity Futures Trading Commission (CFTC)
On 20 January, the White house issued a memorandum to the heads of the federal non-independent executive departments and agencies ordering a freeze on the issuing of new rules until President Donald Trump’s appointees or designees have the opportunity to review such rules. The memorandum ordered the departments and agencies: (i) not to send any rules to the Office of the Federal Register (OFR) until a department or agency head appointed or designated by the President after noon on 20 January 2017 reviews and approves the rule; (ii) to immediately withdraw for review and approval any rules that have been sent to the OFR but not published in the Federal Register; and (iii) to temporarily postpone the effective date of rules that have been published in the Federal Register but that have not taken effect within 60 days of the issuance of the memorandum and for such rules to be reviewed and approved.
On 25 January, Office of Financial Research Director Richard Berner delivered a speech stressing the importance of improving the quality, scope, accessibility, and transparency of financial data to promote financial stability. Describing the Legal Entity Identifier (LEI) system, a barcode-like system for financial data, as the “cornerstone for financial data standards”, Director Berner urged a broader adoption and use of the LEI system by U.S. regulators. Director Berner also noted that certain gaps have persisted in the collection and retention of financial data and indicated that the OFR intends to work with the Federal Reserve and SEC to expand their current programs with a rulemaking to launch an ongoing data collection system.
SEC & SECURITIES
Independence of the SEC
On 17 January, former SEC Chair Mary Jo White delivered a speechaddressing, among other matters, how to maintain the role of the SEC as an effective and independent financial regulator. Chair White expressed her concerns over the ability of the SEC to retain its independence from the executive and legislative branches, citing the Regulatory Accountability Act of 2017 as an example of the recent trend towards more prescriptive statutory mandates that seek to change the way independent regulatory agencies operate. She argued that such prescriptiveness “frustrates the agency’s ability to exercise its expert discretions effectively,” leading to the “significant detriment of both investors and the markets.” She urged lawmakers to keep in mind the independence of the Commission in drafting and promulgating new laws.
o In a statement, House Financial Services Committee Chairman Jeb Hensarling criticized former Chair White for attacking Congress’s efforts to increase the Commission’s accountability and to assist the Commission in analyzing the cost of its many regulations. He further reminded former Chair White that it was Congress that created the Commission, and “not the other way around.”
CFTC & DERIVATIVES
CFTC Acting Chairman and Commissioners
On 20 January, the CFTC designated Commissioner Christopher Giancarlo as acting Chairman of the Commission, replacing Chairman Timothy Massad until a new Chairman is nominated by President Donald Trump and confirmed by the Senate. Acting Chairman Giancarlo has expressed his interest in being nominated as the new Chairman of the Commission, but it is unclear who President Trump will nominate for the position.
On 17 January, former President Barack Obama re-nominated Christopher Brummer and Brian Quintez to be Commissioners on the CFTC. The Senate Committee on Agriculture, Nutrition and Forestry voted in September 2016 to approve the nominations to fill the two vacancies on the Commission, but the nominees did not receive the opportunity for confirmation by the Senate before the arrival of the new Presidential administration and Congress. It is unclear when the nominees will receive their nomination hearings and whether they will be appointed under the new administration and Congress.
Acting Chairman Giancarlo Overview
On 18 January, CFTC Commissioner, now acting Chairman, Christopher Giancarlo delivered a speech setting forth his agenda for the future of the Commission. Acting Chairman Giancarlo focused on five elements of his “Making Market Reform Work for America” agenda, including: (i) providing customer choice in trade execution; (ii) fixing swaps data reporting; (iii) achieving cross-border harmonization; (iv) encouraging FinTech innovations; and (v) cultivating a regulatory culture of forward thinking.
o Providing Customer Choice in Trade Execution: Acting Chairman Giancarlo criticized the current swaps trading framework as being “highly over-engineered, disproportionately modeled on the U.S futures and market, and biased against both human discretion and technological innovation.” In response, he proposed an alternative regulatory framework for swaps trading that will: (i) align regulatory oversight with swaps market dynamics; (ii) strictly align regulatory oversight with the of Title VII of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act); and (iii) promote swaps trading under CFTC rules. This regulatory framework was set forth in acting Chairman Giancarlo’s 29 January 2015 White Paper.
o Fixing Swap Data Reporting: Acting Chairman Giancarlo noted his concern that actions by individual regulators, such as establishing the swap data repositories, have not and would not achieve full visibility into swaps counterparty exposure. He asserted that broadening the implementation of swap data reporting will require a concerted and cooperative effort by “regulators, market participants, commercial technology vendors and academia that draws on the emerging fields of big data analysis, network science and financial cartography.”
o Achieving Cross-Border Harmonization: Acting Chairman Giancarlo argued that the Commission has failed to implement global standards consistent with international standards and criticized the Commission’s cross-border approach as being “over-expansive, unduly complex, and operationally impractical.” He noted that the Commission must set limits on the cross-border application of swaps rules to “achieve the ends of market reform in a spirit of cooperation and deference,” and indicated that he will review various options for easing the 1 March 2017 deadline for variation margin for uncleared swaps.
o Encouraging FinTech Innovation: Acting Chairman Giancarlo urged regulators to adopt a “do-no-harm” approach to facilitating FinTech innovations, particularly by making the Commission more accessible to FinTech innovators.
o Cultivating a Regulatory Culture of Forward-Thinking Effort: Acting Chairman Giancarlo emphasized that the U.S. market reforms must catch up with the rapidly digitized marketplace and that the Commission must establish itself as the “world’s foremost knowledge center of global risk transfer markets.” In addition, he indicated that he is committed to extending the comment period for the Commission’s supplemental proposal to Regulation Automated Trading (AT) to allow more time for public comments on the proposal.
Former Chairman Massad Review
On 18 January, former CFTC Chairman Timothy Massad delivered a speechreviewing the accomplishments of the Commission during his tenure. Former Chair Massad noted that the Commission had: (i) established a regulatory framework for OTC swaps; (ii) enhanced clearinghouse strength, resilience, oversight, and risk surveillance; (iii) achieved “tremendous progress” with international regulatory coordination and cooperation; (iv) enhanced cybersecurity regulation; and (v) enhanced enforcement, especially in response to spoofing and benchmark manipulation. In addition, former Chairman Massad expressed his hope that these accomplishments would be not “undone by the next administration.”
On 23 January, the CFTC announced that it is extending the comment period for the supplemental proposal for Regulation AT to 1 May 2017. The CFTC recognized that additional time is needed for stakeholders to provide public comments on the broad range of topics addressed by and the number of questions contained in the supplemental proposal and extended the comment period.
Withdrawals of Residual Interest
On 26 January, the CFTC Division of Swap Dealer and Intermediary Oversight issued no-action relief to future commission merchants (FCMs) from requirements with respect to certain withdrawals of FCM excess residual interest. For cleared swaps, CFTC rules require FCMs to maintain residual interest in cleared swaps customer accounts to cover any amount in the accounts that is undermargined. In addition, CFTC rules prohibit FCMs from withdrawing any residual interest in such accounts until the FCMs perform their daily cleared swaps segregation calculation at the end of the business day. The CFTC noted that these rules together create a timing gap where FCMs may receive margin from customers during the day to cover any account that is undermargined, but the FCMs are unable to withdraw any residual interest that exceeds the margin required in such accounts as the customers post margin until they perform the segregation calculation at the end of the business day. Thus, the Division issued relief allowing FCMs to withdraw residual interests in customer accounts during the day as such residual interests exceed the amount of margin that is required in such accounts.
DOL FIDUCIARY RULE
On 13 January, the Department of Labor (DOL) released two sets of FAQs, available here and here, for its fiduciary rule, which is scheduled to go into effect on 10 April 2017. The first set of FAQs covered general information relating to the DOL’s fiduciary rule, including: (i) background information on why the DOL adopted the fiduciary rule; (ii) how the DOL anticipates the fiduciary rule will change the financial services industry; (iii) which advisors will be defined as fiduciaries under the rule; (iv) which loopholes the fiduciary rule will close; and (v) clarifications on basic definitions such as “conflict of interest” and “fiduciary.” The second set of FAQs provided various clarifications between fiduciary and non-fiduciary communications, including: (i) defining “investment recommendations” subject to the fiduciary standards and “investment education” and “general communication” not subject to the fiduciary standards; (ii) clarifying the exemption regarding transactions with independent fiduciaries with financial expertise; and (iii) clarifying the exemption regarding marketing platforms for individual account plans and providing assistance in the selection and monitoring of investment alternatives.
On 19 January, the DOL proposed a new rule that would ease compliance with its fiduciary rule for distributors of fixed annuity products. The fiduciary rule contains a best-interest contract exemption (BIC exemption) that allows brokers to receive commission for sales of products if certain compliance conditions are met. However, the current BIC exemption only applies to “financial institutions,” which are generally defined as a bank, insurance company, broker-dealer, or registered investment adviser, and do not apply to other insurance intermediaries such as “independent marketing organizations” (IMOs), “field marketing organizations” (FMOs), and “brokerage general agencies” (BGAs). Other intermediaries must file an application for and be granted “financial institution status” before they are able to make use of the BIC exemption. The proposed rule would establish a new class exemption for IMOs, FMOs, BGAs and other similar intermediaries to use the BIC exemption, subject to certain conditions, allowing such institutions to continue selling indexed annuities on commission in retirement accounts without having to apply for and be granted “financial institution status”. The comment period will close 30 days after publication in the Federal Register and if adopted, the exemption would be available on 10 April 2017.
UPCOMING EVENTS AND DEADLINES
o 14 February: effective date on CFTC policy for aggregation of positions.
o 28 February: comments due on CFTC re-proposal on position limits for derivatives.
o 16 March: comments due on CFTC proposal on capital requirements of swap dealers and major swap participants.