U.K. Among Nations Raising Alarm on U.S. Swap Rules’ Reach

Nine overseas finance officials urge U.S. Treasury Secretary Lew to limit the cross-border reach of derivatives regulations.

Nine overseas finance officials urged U.S. Treasury Secretary Jacob J. Lew to limit the cross-border reach of Dodd-Frank Act swaps rules that they say are fragmenting the $639 trillion global market.

Seven finance ministers joined Michel Barnier, the European Union financial services chief, and George Osborne, U.K. chancellor of the exchequer, to tell U.S. officials to allow for broader recognition of overseas swaps rules. Their letter to Lew follows complaints by JPMorgan Chase & Co., Goldman Sachs Group Inc. and overseas officials about the planned reach of U.S. Commodity Futures Trading Commission rules.

“We are concerned that, without clear direction from global policymakers and regulators, derivatives markets will recede into localised and less efficient structures, impairing the ability of business across the globe to manage risk,” the nine officials wrote in the letter sent to Lew yesterday.

The CFTC, led by Chairman Gary Gensler, has pushed for cross-border swaps rules that cover transactions involving overseas offices of U.S. banks and hedge funds incorporated offshore. The conflict over the international reach of the CFTC’s swaps rules has led U.S. lawmakers to introduce legislation that would restrict the agency.

“If a run starts in one part of a modern financial institution, whether it’s here or offshore, the risk comes back to our shores,” Gensler said in a March 20 speech for an International Monetary Fund conference in Washington.

Steve Adamske, CFTC spokesman, didn’t respond to a request for comment yesterday about the letter.

The U.S. “has been working hard with regulators from key foreign jurisdictions to find practical compromises,” the Treasury Department said in an e-mailed statement yesterday. The U.S. and Japan are “furthest along in the reforms while other countries’ efforts have been delayed.” The Treasury also said the U.S. is the first country to introduce “cross-border proposals to strengthen the transparency and oversight” of over-the-counter derivatives markets.

The overseas officials said U.S. and other regulators need to allow for greater use of substituted compliance, in which one jurisdiction allows another’s to satisfy goals to curb risk in the market. Individual companies shouldn’t need to apply for substituted compliance, and jurisdictions shouldn’t seek a precise rule-by-rule test of comparability, they said.


‘Not Sustainable’

“An approach in which jurisdictions require that their own domestic regulatory rules be applied to their firms’ derivatives transactions taking place in broadly equivalent regulatory regimes abroad is not sustainable,” the officials wrote.

The letter was also signed by finance ministers Guido Mantega of Brazil, Pierre Moscovici of France, Wolfgang Schaeuble of Germany, Anton Siluanov of Russia, Pravin Gordhan of South Africa, Eveline Widmer-Schlumpf of Switzerland and Taro Aso, Japan’s deputy prime minister.

Bloomberg LP, the parent company of Bloomberg News, has filed suit against the CFTC challenging one of the agency’s proposed swaps rules.



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