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CFTC Commissioner Sommers Criticizes Volcker Rule and Argues for Comprehensive Guidance on Dodd-Frank's International Implications

Thursday, March 8, 2012
Fanni Koszeg | Bloomberg LawCFTC Speech, Jill Sommers, Remarks before the Institute of International Bankers, Annual Washington Conference (Mar. 6, 2012) Commissioner Jill Sommers spoke to representatives of the international banking community about the cross-border implications of the Commodity Futures Trading Commission's (CFTC) rulemaking efforts pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Sommers also addressed legal developments in derivatives regulation around the globe and how harmonization efforts among regulators are progressing. In particular, she was highly critical of the CFTC's Volcker Rule proposal and urged her fellow Commissioners to provide clear and comprehensive guidance on when and why foreign financial entities are subject to U.S. regulations.

State of Financial Reform in the United States

Sommers voiced her dissatisfaction with her own agency's rulemaking process and argued for a more "reasonable, measured" approach. She said that regulators "don't know what the full impact of [their] rules will be" on previously unregulated swaps markets and "whether the assumptions [they] are operating under are valid." Sommers referred to the CFTC's recent block trade proposal as an example of an overly specific regulation that relied on "stale data and far too little of it." For more background on the controversy surrounding the block trade proposal, see CFTC Commissioners Disagree on Benefits of Final Business Conduct Rule and Re-Proposed Controversial Block Trading Rule, Bloomberg Law Reports® — Derivatives Law, Vol. 3, No. 5 (Mar. 5, 2012).

Guidance on Dodd-Frank's Extraterritorial Application

Sommers emphasized the need for crafting derivatives regulations that are appropriate for a global market. "These issues are very complex, and the possibility of divergent views among international regulators is very real," she said. With Section 722(d) of Dodd-Frank, Congress expressed a general intent for Dodd-Frank's provisions to apply to activities abroad under certain circumstances. However, it was left up to the CFTC and the Securities and Exchange Commission (SEC) to determine the exact parameters of Dodd-Frank's "extraterritorial" reach. Sommers said that "setting the precise scope of Dodd-Frank with respect to cross-border activities of foreign entities is necessary to preserve the continuity of global business operations." As a first step, the CFTC is planning to issue guidance on which entities will be required to register as U.S. swap dealers or major swap participants, and other matters, including clearing and market infrastructure issues, will be addressed separately at a later date. Sommers argued that this "piecemeal approach to issues of extraterritoriality" was wrong, and the CFTC, in coordination with the SEC, should propose a comprehensive rule that "will give market participants some degree of certainty." The Commissioner cited several international regulators who are eager to understand how far CFTC regulations would reach and when U.S. regulators would choose to defer to their foreign counterparts.

Volcker Rule Disliked by International Community

The CFTC's (and other federal regulators' nearly identical) Volcker Rule proposal issued pursuant to Section 619 of Dodd-Frank is one of the most controversial examples of a U.S. regulation that would extend to global markets. Sommers criticized the proposal as "lengthy and extremely complex" and chided the CFTC for not taking into account the numerous comment letters submitted on the other federal regulators' previously issued proposal. Sommers referenced comments from "high ranking officials," such as Bank of Canada Governor Mark Carney, EU Financial Services Commissioner Michel Barnier, and the Chairman of the United Kingdom's Financial Services Authority. Some of those officials and industry groups representing market participants have argued that in its current form, the Volcker Rule would reduce market liquidity and increase borrowing costs in non-U.S. sovereign debt markets. In response, Sommers urged U.S. regulators to "come together and form a reasonable approach to the many difficult issues included in the prohibitions and restrictions on proprietary trading." For more background on a defense of the Volcker Rule proposal by Paul Volcker himself, see Volcker on Volcker: Former Federal Reserve Chairman Addresses Arguments against Proprietary Trading Reforms, Bloomberg Law Reports® — Derivatives Law, Vol. 3, No. 5 (Mar. 5, 2012).

Global Regulatory Developments and Coordination Efforts

As chair of the CFTC's Global Markets Advisory Committee, Sommers has participated for the past three years in the technical committee meetings of the International Organization of Securities Commissions (IOSCO). In her role, Sommers has been in charge of monitoring regulatory developments in the European Union and several Asian countries, and she has participated in a number of meetings with her counterparts. Sommers is also actively working with the IOSCO task force on over-the-counter (OTC) derivatives, which is preparing several reports, including on mandatory clearing, trading, and data aggregation requirements. For more background on recent European regulatory developments, see ESMA Commences Rulemaking Process for OTC Derivatives, Bloomberg Law Reports® — Derivatives Law, Vol. 3, No. 5 (Mar. 5, 2012). Sommers also gave an update on regulatory developments in several Asian countries:
  • Japan. The financial regulator now has the authority to regulate OTC derivatives and is expecting to finalize rules by November 2012.
  • Hong Kong. Regulators issued a paper on a proposed OTC regulatory regime last fall and are hoping to adopt final regulations by the end of 2012.
  • Singapore. The main financial authority issued a consultation paper on February 13, 2012 to meet its G20 mandate on the trading, clearing, and reporting of OTC derivatives.
Sommers emphasized the need for more international coordination to ensure global rules work for global markets for many years to come. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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