Warnings About Splits in Global Derivatives Rules

Heads of largest U.S. derivatives exchanges voice concerns about inconsistencies between regulatory regimes and proposed fees on the industry.

Top executives of the two largest U.S. derivatives exchanges say regulators must take further steps to align Dodd-Frank Act rules with those of foreign counterparts to avoid oversight splits that could harm markets.

The Commodity Futures Trading Commission and overseas agencies have a few months to improve coordination before differences hurt business, IntercontinentalExchange Inc. Chairman and Chief Executive Officer Jeffrey Sprecher said at a House Agriculture Committee hearing where he testified alongside CME Group Inc. Executive Chairman Terry Duffy.

“Global financial reform efforts are not being harmonized, and substantial differences remain between regulatory regimes,” Sprecher said at today’s hearing in Washington. “It is crucial to understand that if countries erect barriers, markets and market participants will be damaged.”

The CFTC and Securities and Exchange Commission are leading U.S. efforts to revamp oversight of the $633 trillion global swaps market after unregulated trades helped fuel the 2008 credit crisis. Representative Frank D. Lucas, the Oklahoma Republican who leads the Agriculture Committee, called the hearing to begin considering changes to the law that authorizes the CFTC to provide oversight of swaps and futures markets.

Duffy warned lawmakers that a proposal to pay for market oversight through industry fees would drive business out of the U.S. A user fee on market-making represents a tax that threatens to increase costs on users of derivatives, he said.

Contentious Rulemaking

The international reach of the CFTC’s swap rules has been one of the most contentious parts of the agency’s Dodd-Frank work, drawing opposition from banks including JPMorgan Chase & Co., Goldman Sachs Group Inc., and Barclays Plc. European and Asian regulators criticized the U.S. agency for the reach of rules requiring trades to be guaranteed at clearinghouses and traded on exchanges or other platforms.

Swaps rules under consideration in the U.S. are fragmenting the global market, nine overseas finance officials said in an April 18 letter urging U.S. Treasury Secretary Jacob J. Lew to limit Dodd-Frank’s reach.

“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 to Lew, who has no formal role in the agencies’ rulemaking.

CFTC Chairman Gary Gensler has pushed for rules to cover foreign branches and subsidiaries of U.S. banks unless overseas regulations are comparable enough to accomplish the same goals.

“Because markets are global and capital flows across borders, no single country or regulatory regime oversees the derivatives market,” Sprecher said in his prepared remarks. “In order to make long-term business decisions, market participants require certainty that their transactions will not be judged on conflicting standards.”

The lack of coordination between among regulators is forcing ICE to consider splitting contracts into different versions for each jurisdiction, he said at the hearing.

European regulators face a regulatory process that is so rigid “that to change is like turning around an oil tanker,” Stephen O’Connor, chairman of the International Swaps and Derivatives Association Inc., told lawmakers at the hearing. “People shouldn’t underestimate the seriousness of potential conflict.”

At today’s hearing, the Agriculture Committee also debated ways to improve protection of client funds after money went missing during the downfalls of MF Global Holdings Ltd. and Peregrine Financial Group Inc.

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