The U.S. Commodity Futures Trading Commission voted to propose guidance for the international reach of Dodd-Frank Act derivatives rules for JPMorgan Chase & Co., Goldman Sachs Group Inc. and other financial institutions, according to two people briefed on the matter.
The guidance approved today after a unanimous vote by the CFTC’s five commissioners will determine which overseas units of U.S. banks must comply with rules dictated by the 2010 regulatory overhaul. The vote was conducted through a private process in which commissioners gave their approval on paper.
“During a default or crisis, the risk that builds up offshore inevitably comes crashing back onto U.S. shores,” CFTC Chairman Gary Gensler said in a statement. At least $2 billion in credit-derivatives trading losses in London at JPMorgan demonstrate the need for guarding against risks accumulated in overseas operations of U.S. firms, he said.
Financial firms set up legal entities in part to minimize regulatory, capital and other requirements through “regulatory arbitrage.” Gensler said. The guidance allows for so-called substituted compliance in some cases where overseas jurisdictions have comparable rules, he said.
“Foreign swap dealers, as well as overseas branches of U.S. swap dealers, in certain circumstances, may rely on substituted compliance when transacting with foreign affiliates guaranteed or operating as conduits of U.S. entities,” Gensler said in the statement.
The CFTC document will be open for public comment, which Gensler said isn’t required for so-called interpretive guidance. The agency didn’t immediately release the guidance or a separate document governing the timetable for compliance.