Comment Text:
Definitions Meeting with Weil Gotshal
Thursday, February 17, 2011
Memo from
Fajfar, Mark
CFTC Staff :
Terry Arbit
Mark Fajfar
Julian Hammar
David Aron
Vivek Jain
Steve Kane
Greg Kuserk
Rose Troia
Somi Seong
Christopher Cummings
Natalie Markman Radhakrishnan
External Attendees :
Heath Tarbert (Weil, Gotshal & Manges)
Bradley Dizik (Weil, Gotshal & Manges)
Additional Information :
The conference call discussed a client of Weil, Gotshal & Manges (Weil) that is a sovereign wealth fund, but which Weil did not identify. The comments of Weil were considered as being applicable to sovereign wealth funds in general, while acknowledging the differences between various sovereign wealth funds.
The call focused on the request in the proposed definition of major swap participant (MSP) for comment on whether sovereign wealth funds should be excluded from the definition, and whether the exclusion should depend on whether the fund is backed by the full faith and credit of a foreign government. Weil generally believes that sovereign wealth funds should not be treated as MSPs because they don’t present the risks underlying the statutory definition of MSP and they are subject to regulation in their home countries. Also, extraterritoriality and sovereignty concerns weigh in favor of excluding the funds from the MSP definition. Last, the funds are generally well-capitalized, do not use excessive leverage and have low exposure to swaps in relation to their size.
Sovereign wealth funds generally reduce systemic risk by investing in areas where other investors do not. Also, sovereign wealth funds are less likely to default on their obligations because of concerns about the negative effect it would have on the sovereign nation’s reputation. The funds limit their swaps to other dealers; they do not interact with end users in a way that raises business conduct concerns.
The exclusion from the MSP definition should apply when the sovereign wealth fund has met certain criteria, such as adherence to the Santiago Principles and being subject to home country regulation that is comparable to US regulation. (Whether the regulation is comparable could be determined on a general basis by US regulators, rather than a specific determination by the CFTC.) Limiting the exclusion to cases where the fund is subject to home company regulation would avoid duplicative regulation.
