The Commodity Futures Trading Commission approved a final rule Wednesday that eliminates duplicative business conduct and documentation requirements for swap dealers and major swap participants, ending more than a decade of regulatory uncertainty in the derivatives market.
The rule codifies existing staff no-action positions for certain CFTC business conduct and documentation requirements applicable to swap dealers and major swap participants. The amendments also harmonize the CFTC's rules with those of the Securities and Exchange Commission and the Municipal Securities Rulemaking Board, creating a more unified regulatory framework across agencies.
"Finally, the Commission is eliminating duplicative, unnecessary requirements and excessive costs that have negatively impacted American competitiveness for over 10 years with no measurable benefit," said Acting Chairman Caroline Pham. "I'm pleased to clean up the lack of regulatory clarity and create clear, simple rules that will promote more efficient and well-functioning markets."
The final rule addresses longstanding concerns from market participants about overlapping and conflicting requirements that have imposed significant compliance costs on swap dealers without providing corresponding benefits to market integrity or investor protection. Industry groups have repeatedly criticized the patchwork of regulations that emerged following the 2010 Dodd-Frank Act, arguing that duplicative requirements between different regulatory agencies created unnecessary operational burdens.
Swap dealers are financial institutions that make markets in derivative contracts known as swaps, which allow parties to exchange cash flows based on underlying assets or indices. Major swap participants are entities that maintain substantial swap positions that could create systemic risk to the banking system or financial markets. Both categories of firms have been subject to extensive regulation since the 2008 financial crisis.
The CFTC's action comes as regulators across agencies have been working to streamline derivatives regulations while maintaining market oversight. The harmonization with SEC and MSRB rules represents a significant step toward reducing regulatory fragmentation that has complicated compliance for firms operating across multiple jurisdictions and asset classes.
Pham's comments highlight the Commission's focus on improving American competitiveness in global derivatives markets. The derivatives industry has argued that excessive regulatory costs have pushed trading activity to overseas markets with lighter regulatory frameworks, potentially undermining U.S. market leadership in this critical financial sector.
The rule builds on existing no-action positions that CFTC staff had previously issued to provide relief from certain requirements. By codifying these positions into formal rules, the Commission provides greater certainty and permanence to the regulatory framework, eliminating the need for market participants to rely on temporary staff guidance that could be withdrawn or modified.
In conjunction with the final rule, the CFTC's Market Participants Division issued a related no-action letter addressing certain UK trading facilities. This letter supersedes CFTC Staff Letter No. 23-01 in light of the final rule, indicating that the Commission is also updating its cross-border regulatory approach to reflect the new framework.
The timing of the rule's approval reflects the CFTC's broader regulatory agenda under Acting Chairman Pham's leadership. The Commission has emphasized the importance of right-sizing regulations to ensure they achieve their intended policy goals without imposing unnecessary costs on market participants.
For swap dealers and major swap participants, the rule provides immediate relief from certain compliance obligations that industry participants have described as redundant and costly. The elimination of duplicative requirements is expected to reduce operational costs and simplify compliance programs, particularly for firms that operate across multiple regulatory jurisdictions.
The harmonization aspect of the rule addresses a key concern that has persisted since the implementation of derivatives reforms following the financial crisis. Different agencies developed overlapping but not identical requirements, forcing market participants to navigate complex compliance matrices that often required separate systems and processes for similar regulatory objectives.
The rule's impact extends beyond immediate cost savings to broader questions about regulatory efficiency and market structure. By eliminating requirements that provided "no measurable benefit," as Pham noted, the CFTC signals a willingness to reassess existing regulations based on their actual effectiveness rather than maintaining them simply because they were previously adopted.
Market participants will likely welcome the increased regulatory certainty that comes with codifying previously informal staff positions. The derivatives industry has long called for more predictable and permanent regulatory guidance, arguing that reliance on staff letters and no-action positions creates uncertainty about the durability of regulatory relief.
The final rule represents a notable shift in the CFTC's approach to derivatives regulation, emphasizing efficiency and competitiveness alongside traditional market oversight objectives. This balance reflects ongoing debates about the appropriate level of regulatory burden in financial markets and the trade-offs between market safety and operational efficiency.