‘Insanity’ in U.S. Overseas Swaps Policy

CFTC commissioner cites legal and enforcement issues surrounding agency's regulation of swaps trades performed by U.S.-based firms for overseas affiliates.

A Commodity Futures Trading Commission (CFTC) policy extending the Dodd-Frank Act’s reach to more overseas swap trades raises “problematic” legal issues, one of the agency’s commissioners said.

Scott O’Malia, a Republican, criticized recent staff opinions on the agency’s oversight of foreign derivatives deals as “regulatory insanity.” The CFTC told banks last month that it would impose Dodd-Frank rules when they arrange trades domestically and then book them overseas.

“I question the wisdom of spending commission resources to chase after a foreign swap transaction that has nothing to do with the United States,” O’Malia said today in prepared remarks for a Futures Industry Association conference in Singapore.

He said that there are “problematic legal and enforcement issues surrounding these staff documents,” which were released without commission votes. Three Wall Street trade groups are preparing to sue the CFTC as soon as this week over the foreign guidance.

The CFTC’s Democratic Chairman Gary 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 agency said in a Nov. 14 advisory that U.S.-based traders who arrange, negotiate, or execute a deal—even on behalf of an overseas affiliate—must comply with the 2010 Dodd-Frank law. 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.

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