Cross-Border Application of OTC Derivatives Rules: Revisiting the Substituted Compliance Approach

The substituted compliance regulatory framework is currently being phased in for cross-border over-the-counter (OTC) derivatives transactions involving US and, in some instances, non-US dealers. Implementation of a substituted compliance regime revealed significant flaws in how regulators approached the extraterritorial application of their authority. This article revisits the approach to substituted compliance with OTC derivatives rules and suggests that a calibration of this approach, which would create a more flexible framework while not affecting allocation of systemic risk, is required.