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Statement at SEC Open Meeting – Proposed Rules Relating to Cross-Border Security-Based Swap Activities

Commissioner Daniel M. Gallagher

May 1, 2013

Thank you Chair White. I would like to join my colleagues in thanking the staff for all of the hard work that went into today’s 1,000 page proposing release.  And I am happy for my old Division, Trading and Markets -- Corp Fin had their aircraft carrier, and TM now has a squadron!  Although it has already been duly noted, I would like to acknowledge the tremendous efforts of Brian Bussey, Matthew Daigler, Nathaniel Stankard, Wenchi Hu, Richard Gabbert and Richard Grant, and their colleagues in the Division of Trading and Markets.  I also want to acknowledge, as always, the excellent work of the staff of the Division of Risk, Strategy, and Financial Innovation and the Office of the General Counsel.

Today’s proposing release is substantial.  But it is only a first step towards the overall goal of addressing how to implement a cohesive yet flexible plan for the nuts and bolts implementation of the many grandiose domestic and international regulatory mandates for the OTC derivatives markets.  This release is a significant attempt by the Commission to establish a rational global framework for the implementation of mandated OTC derivatives regulation. And rational, smart regulation is exactly what is needed in this area right now. 

There have been many public reports about the CFTC's proposed extraterritorial approach, stating that it is an aggressive attempt to extend the reach of the CFTC OTC derivatives rules deeply into foreign jurisdictions. And, key foreign regulators have expressed serious reservations about the CFTC’s approach.  Leading policymakers from the European Commission, the United Kingdom, France, and Japan wrote a joint letter to the CFTC requesting that it refrain from taking action that would risk fragmenting and damaging the derivatives market, arguing instead for an approach grounded in principles of regulatory equivalence and substituted compliance.1  A similar letter was sent to Treasury Secretary Jack Lew two weeks ago by some of the same policymakers, as well as others from Germany, Brazil, Italy, Russia, South Africa and Switzerland.2  As EU Internal Markets Commissioner Michel Barnier noted in a piece in the Financial Times, “[t]he biggest danger to success is that of excessive attempts by regulators to exercise authority beyond their normal boundaries.”3

 I have sat across the table from many senior foreign officials in jurisdictions that avoided the global financial crisis, and I have been told point blank that they are watching what we do in this area, and that if U.S. regulation is irrational, we risk regulatory balkanization.  Twenty years ago, that would have been an idle threat.  Today, with the rapid growth of newly emerging markets and the unbridled growth of rulebooks in the U.S. and E.U., the threat is real.  I believe that smart regulation and a vibrant, real system of substituted compliance is the only way forward.

As readers and commenters will see, this release proposes substituted compliance for certain regulatory objectives.  I have publicly stated several times that substituted compliance acknowledges the reality that as to any given financial product or activity, there are likely to be high quality regulatory regimes other than ours.  It also recognizes the reality that we cannot, and should not, be the world’s securities regulator.  At the same time, it is important to recognize that it is critically important for this deference to be mutual to have any hope of achieving its objective.  It is not a one way street, and the process that gets us there should not be filled with political potholes. 

Our experience with the European Union’s regulatory regime for credit rating agencies is a case in point. The EU’s equivalency finding as to U.S. regulation of Credit Rating Agencies came after several years of protracted bureaucratic processes. The initial European Securities Market Authority (ESMA) opinion, issued in 2010, found that U.S. CRA regulation should not be deemed equivalent to that of the EU in certain significant respects.4 In 2012, however, citing the enactment — two years earlier — of the Dodd-Frank Act as justification, ESMA revised its earlier opinion to conclude that U.S. regulation of CRAs was, in fact, equivalent to that applicable under EU regulations. The European Union followed with its equivalency determination several months later.5

In applying the substituted compliance provisions included in the present proposal, we must not allow deference to other nations’ different, but similarly intended, treatments of cross-border derivative regulation to be subverted by bureaucratic obstruction. 

Today’s proposing release will add our voice to the ongoing conversations on these critical subjects, and I’m pleased to be able to support its publication for public comment.  Lastly, I want to stress that, while I think we are generally moving in the right direction with this proposal, I am not convinced that we got it exactly right, so I look forward to receiving meaningful comment on these critically important issues.

1 See Letter from Hon. George Osborne, Hon. Michel Barnier, Hon. Ikko Nakatsuka, and Hon. Pierre Moscovici to Hon. Gary S. Gensler (Oct. 17, 2012), available at

2 See Letter from hon. Taro Aso, Hon. Michel Barnier, Hon. Pravin Gordhan, Hon. Guido Mantega, Hon. Pierre Moscovici, Hon. George Osborne, Hon. Wolfgang Schäuble, Hon. Anton Siluanov, and Hon. Eveline Widmer-Schlumpf to Treasury Secretary Jack Lew (Apr. 18, 2013), available at

3 See Michel Barnier “The U.S. Must Not Override EU Regulators”, Financial Times (June 21, 2012).

4 ESMA technical advice to European Commission, 21 May 2010.

5 European Commission Implementing Decision 2012/628/EU, 5 October 2012, OJ L 274/32 (9 Oct. 2012). In separate decisions on the same day, the EU also found the CRA regulations of Australia and Canada equivalent to those of the EU.

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