CFTC Weighs Delay in Cross-Border Rule

As July 12 vote approaches, commission members reportedly remain at odds over CFTC oversight of trades conducted beyond U.S. borders.

The U.S. Commodity Futures Trading Commission (CFTC) is considering a six-month phase-in period to implement new rules for overseas swaps trades, according to two people with knowledge of the deliberations.

Regulators face a Friday deadline to resolve a deadlock over how far to expand the regulator’s oversight over trades conducted outside the U.S. by banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc.

CFTC members remain at odds over the regulator’s overseas reach, according to the people, who spoke on condition of anonymity because the deliberations are private. The agency has set a July 12 meeting to vote on the rules.

The international reach of Dodd-Frank Act regulations has been one of the most controversial parts of the government’s effort to reduce risk and increase transparency in the $633 trillion swaps market. Regulators around the world decided to increase oversight of the market after largely unregulated swaps helped fuel the 2008 credit crisis and led to the collapse of American International Group Inc., a New York-based insurer that booked many of its swaps trades in Europe.

The CFTC’s proposed guidelines—which could extend agency oversight to many trades conducted by overseas U.S. banks or subsidiaries—have created a rift with foreign regulators, who say their rules are sufficient for regulating derivatives trades in their jurisdictions.

“Having told us to get our act together—which we are now clearly doing—is the U.S. suggesting that they cannot trust our systems and that only their rules can apply?” Nadia Calvino, the European Commission’s deputy-director general for internal market and services, said in a speech last week in Brussels.

The CFTC’s proposed guidance was criticized by JPMorgan and other U.S. banks for threatening to put them at a competitive disadvantage when they trade overseas.

Swaps trading has been a major source of revenue for large U.S. banks, and some have conducted roughly half of such trades overseas, often through branches or subsidiaries. JPMorgan, the nation’s biggest bank by assets, often derives as much of its quarterly revenue from global operations as from those in the U.S., Associate General Counsel Don Thompson said last year.

CFTC Chairman Gary Gensler has pushed for a broad reach of Dodd-Frank rules because of the potential for trades overseas to flow back to institutions in the U.S. and possibly put taxpayers at risk. He has frequently cited the 2008 collapse of AIG as a warning.

“Risk also comes crashing back to our shores from overseas when a run starts in any part of a modern, global financial institution,” Gensler said in a June 6 speech to an industry conference in New York.

Treasury Secretary Jacob J. Lew held a meeting last week with Gensler and Securities and Exchange Commission (SEC) Chairman Mary Jo White, whose agency is also working on derivatives rules, to improve discussions about the cross-border issue, according to a person familiar with the meeting who requested anonymity because it was private. Gensler and the CFTC were urged to share more information about its process, the person said.

‘Cooler Heads’

Fourteen Republican and Democratic members of the House Agriculture Committee, which oversees the CFTC, today called on Lew to intervene in the rulemaking process. The members called on Lew to direct the 10-member Financial Stability Oversight Council (FSOC) to resolve uncertainty in the market generated by the debate. “Cooler heads must prevail,” the Representatives—including K. Michael Conaway, a Texas Republican, and David Scott, a Georgia Democrat—said in the letter.

A temporary exemptive order that the agency completed last year expires on July 12, prompting the agency’s four commissioners, particularly Gensler and Democrat Mark Wetjen, into a last-minute negotiating session. Jill E. Sommers stepped down yesterday as a Republican commissioner, leaving an open spot on the five-member panel.

“This thing needs to be resolved one way or another by the 12th,” Bart Chilton, one of three Democrats, said yesterday. “If we can reach a resolution prior to the meeting, great. If we can’t, let’s meet and hammer it out there.”

Thirteen lobbying groups representing Wall Street, overseas banks, and other companies urged senators to work with the CFTC and SEC to delay the deadline. The groups, including the Securities Industry and Financial Markets Association and International Swaps and Derivatives Association Inc., asked for a delay of at least six months to allow for increased coordination between U.S. and foreign authorities.

Commissioners are discussing three documents: final guidance for how Dodd-Frank rules ought to be applied, a phase-in process, and a separate letter on some transaction and record-keeping rules providing that European requirements are essentially identical, according to a one of the people with knowledge of the process. Gensler and CFTC employees have been in negotiations with European regulators on the letter, the person said.

One of the biggest debates is when the CFTC will allow companies to comply with overseas rules to substitute their compliance with Dodd-Frank. Commissioners are negotiating when and how that process will be applied and whether firms located in the U.S. might be eligible for substituted compliance when they are on one side of a trade with non-U.S. counterparties.


‘Moral Hazard’

“People are perpetuating this lie that if we don’t extend our reach to U.S. entities operating elsewhere they won’t be regulated,” Sommers said in a telephone interview.

“It is in fact moral hazard for the CFTC to claim we have the resources to do this. We should want the help of global regulators,” Sommers said. “That’s unfortunately not the view of the chairman.”

The EU has said that a solution to the dispute lies in a so-called equivalence, or substituted compliance system, in which U.S. regulators would accept that EU rules are as robust as U.S. standards, and so avoid imposing additional requirements on EU-based banks.

Equivalence and substituted compliance are “the only way forward to protect financial stability, while allowing the financial sector to allocate capital efficiently throughout the world,” Calvino said.

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