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by Craig Donner

Related Information

European Reform Reaches Milestone

DTCC submitted testimony to a Congressional subcommittee stating that the reach of the Dodd-Frank Act beyond U.S. borders could impede global regulatory cooperation and undermine efforts to increase market transparency and mitigate risk in the over-the-counter (OTC) derivatives market.

A government's application of its laws outside its territory, known as extraterritoriality, has emerged as a hot-button issue in the ongoing debate over financial reform.

In testimony submitted to the House Capital Markets Subcommittee, Larry Thompson, DTCC managing director and general counsel, pointed to two key extraterritorial concerns in the law – complete and total access to information held in U.S.-based swap data repositories (SDR) and the need for non-U.S. regulators to indemnify SDRs in exchange for swaps data.

"Many policymakers in Europe, Asia and the U.S. have expressed serious concerns over the broad reach of Dodd-Frank across jurisdictions and borders," Thompson said. "Unintended consequences are unavoidable if the U.S. tries to impose its rules outside its borders and if other nations attempt to do the same."

The House hearing to which DTCC submitted testimony, entitled "Limiting the Extraterritorial Impact of Title VII of the Dodd-Frank Act," followed public comments by Treasury Secretary Timothy Geithner on the need to resolve extraterritorial issues and the release of a report by U.S. regulators that acknowledged gaps may exist in the new global regulatory framework.

The law explained

Under Dodd-Frank, any entity that collects and maintains swaps data and provides a centralized recordkeeping service must register in the U.S. as a SDR.

The law also requires SDRs that hold any data with a U.S. nexus to give the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) complete access to all data in the repository (known as plenary access), including information that falls outside the jurisdiction of the agencies.

The indemnification provision requires non-U.S. regulators to sign "indemnification agreements" with U.S.-based SDRs in order to access data in which they have a material interest. The agreement confirms that the regulators will abide by confidentiality requirements and that they will compensate the SDR and the U.S. agencies for any expenses arising from litigation related to this information.


Conflict with global agreement

These provisions of Dodd-Frank conflict with existing guidelines and data-sharing practices among global regulators.

At present, access to data is governed under guidelines established by the OTC Derivatives Regulators' Forum (ODRF), which requires regulators to maintain the confidentiality of information obtained and to affirm that the information is of material interest to their oversight duties. The ODRF comprises more than 50 international financial regulators, including the CFTC, the SEC, Federal Reserve Banks of New York and Chicago, and the Federal Reserve Board in the U.S.

As an example of how the Dodd-Frank provisions conflict with the ODRF guidelines and current data-sharing practices among global regulators:

  • Access to data: Under Dodd-Frank, plenary access rights would allow U.S. regulators to review data on a trade between two British banks transacting in the U.K. involving a British underlying entity – even though the U.S. has no material interest in that transaction.

  • Under ODRF guidelines, the U.S. would not be authorized to access this data.

  • Indemnification: Under Dodd-Frank, a British regulator would be required to indemnify a U.S. registered SDR to obtain this data despite the transaction falling wholly within British regulatory jurisdiction.

ODRF-agreed guidelines would only allow the British regulator access to this data.

"The direct access provision was intended to ensure U.S. authorities can regulate the SDR - not to grant them unlimited access to information they would not otherwise be entitled to for their market surveillance activities," Thompson said. "Taken together, the plenary access and indemnification provisions will impede global regulatory cooperation, risk fragmentation of a global data set for OTC derivatives and undermine efforts to increase market transparency and mitigate risk in this market."

-Larry Thompson, DTCC managing director and general counsel

Impact on market transparency

Policymakers in Europe and Asia have expressed deep concerns about the reach and scope of the indemnity provision and have warned that it creates an environment for data fragmentation, according to Dan Cohen, DTCC managing director, Government Relations. In fact, many regulators worldwide have said that the indemnification provision may force jurisdictions outside the U.S. to establish their own "national" repositories.

Cohen pointed to recent discussions DTCC held with Asian regulators such as the Hong Kong Monetary Authority (HKMA), which is already moving forward with plans to build its own repository.

"Should there be a proliferation of repositories, it raises the specter of fragmentation of the current global data set into multiple local sets and limits the ability of regulators globally to have a comprehensive, aggregated view of market activity," Cohen said. "These provisions are fundamentally flawed. They fail to recognize that many foreign legal systems are unable or unwilling to enter into such agreements. Likewise, they fail to recognize the inability of the U.S. to accept reciprocal demands from foreign entities."

Technical corrections

When Congress passed Dodd-Frank in 2010, it acknowledged that technical corrections to the law would be necessary to address unintended consequences. The issues of direct access and indemnification have gained considerable attention among U.S. lawmakers in recent months and there now appears to be broad bipartisan and bicameral support in the U.S. Congress for a legislative measure to correct these technical drafting errors.


In addition, CFTC Chairman Gary Gensler and SEC Chairman Mary Schapiro have focused on the indemnification issue and have written to European Commissioner Michel Barnier on the subject. However, the agencies noted that any remedy must originate in the legislature.

For its part, DTCC has developed several potential approaches to resolving the issue and is working with Congress to secure a technical correction to the law, according to Thompson.

"Regulators need to harmonize the new rules to create a consistent global regulatory framework that creates a level playing field across borders," he said. "Congress must address the issues of direct access and indemnification to ensure that U.S. and non-U.S. regulators continue to have access to as much information tomorrow as they do today."@