The top U.S. derivatives regulator gave Wall Street two months to abide by a new policy imposing Dodd-Frank Act rules on banks when they arrange trades domestically and then book them overseas.
The Commodity Futures Trading Commission (CFTC) postponed a Nov. 14 advisory that undermined a legal interpretation Wall Street had found buried in a footnote, number 513, in an earlier agency document. Banks relied on the footnote to keep swap deals off electronic platforms and away from the agency’s rules that were put in place in the wake of the 2008 financial crisis.
In a letter released yesterday, the agency said that it agreed to the delay after swaps dealers said they needed “additional time” to “allow them to organize their internal policies and procedures to come into compliance.”
The Nov. 14 advisory said that U.S.-based traders who arrange, negotiate, or execute a deal—even on behalf of an overseas affiliate—must comply with Dodd-Frank, which gave the agency oversight of the swap markets. Along with its potential to disrupt their current deals, banks are concerned that the language in the opinion is broad enough to expose their overseas swaps to more regulation.
The delay comes as two Wall Street trade groups, the Securities Industry and Financial Markets Association (Sifma) and the International Swaps and Derivatives Association, are preparing to sue the CFTC as early as this week over foreign guidance the agency issued in July. The Nov. 14 advisory interprets that guidance.
The delay gives derivatives dealers until Jan. 14 to comply with the new policy. One of the banks’ biggest complaints has been that the agency refused to publicly state when it would take effect.
Gensler and the industry have been locked in a five-year battle over rules to make the $693 trillion derivatives market safer and less opaque. How to apply the new regulations overseas has been among the most contentious issues, with Goldman Sachs Group Inc., JPMorgan Chase & Co., and other swap dealers pushing to limit the CFTC’s reach into other jurisdictions.
The biggest banks conduct at least half their swaps business with overseas clients, according to some estimates. Gensler has fought to extend his agency’s authority into foreign transactions, pointing out that several major financial failures, including the collapse of American International Group Inc., originated in overseas units.
After the CFTC guidance quashed their interpretation of the footnote, the industry decided to sue the agency, claiming that it didn’t follow the proper procedures for issuing regulations, according to people briefed on the matter.
Cheryl Crispen, a spokeswoman for Sifma, said the association is exploring “all available options” in response to the CFTC actions. A spokesman for Isda, Steven Kennedy, said the association is “extremely concerned” about the impact of the recent advisory opinions.