Global Regulators in Talks with Industry

CFTC and Hong Kong securities regulators are said to be meeting with financial industry representatives to discuss cross-border derivatives rules.

Global regulators are holding closed-door meetings with financial industry representatives to discuss derivatives rules that banks have sought to curb, according to three people with knowledge of the matter.

Regulators including the U.S. Commodity Futures Trading Commission (CFTC) and the Hong Kong Securities and Futures Commission met in Washington yesterday to discuss the cross-border reach of derivatives rules, according to the people, who asked not to be named because the meeting was private. The meeting, convened by the International Organization of Securities Commissions (Iosco), included representatives of the world’s largest swap dealers as well as consumer advocates.

The Iosco panel is gathering information on differences between rules in the U.S. and elsewhere in an effort to improve coordination of regulations put in place since the 2008 credit crisis. The group has also held meetings in London and Hong Kong, one of the people said.

The international reach of swap rules has been among the most contentious issues between regulators and financial firms that operate around the world. Wall Street lobbying groups representing banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. sought in a December lawsuit to limit the CFTC’s ability to impose rules outside the U.S.

The agency has also begun monitoring the latest effort by U.S. banks to avoid CFTC restrictions by restructuring their overseas trading divisions, an agency official said last week. U.S. banks have taken steps in recent months to trade swaps with each other and with foreign-based banks outside of Dodd-Frank Act rules, the person said.

The latest wrinkle arises from the rules that Dodd-Frank applies to trades in overseas affiliates that operate with the financial guarantee of their parent U.S. firm. Non-guaranteed affiliates are subject to less scrutiny than overseas branches or guaranteed affiliates, the agency said in July guidance.

The largest swap dealers have been removing those guarantees from affiliates or specific transactions so they can trade with each other in the interdealer market without being subject to CFTC rules mandating price competition, according to three other people familiar with the transactions who also asked for anonymity.

“It’s really incumbent upon us to figure out what’s going on,” Scott O’Malia, a Republican commissioner, said yesterday in a phone interview. He said he has asked the CFTC for a memo or legal analysis about the industry’s actions with non-guaranteed affiliates and transactions and how they interact with the agency’s cross-border guidance.

 

Unraveling Dodd-Frank

“You could potentially use this to unravel big chunks of Dodd-Frank,” said Marcus Stanley, policy director for Americans for Financial Reform, a coalition that includes the AFL-CIO labor union. The CFTC should institute a default presumption that affiliates are guaranteed by their parent company unless a bank can prove otherwise, he said. “If they can’t do that then they should be seen as guaranteed.”

The CFTC and Securities and Exchange Commission (SEC), which also has oversight of derivatives, are letting U.S. banks pretend their foreign affiliates aren’t backed by their domestic banks, Senator Jeff Merkley, an Oregon Democrat, said in an e-mailed statement.

“The CFTC and the SEC must close this dangerous loophole and close it quickly, and if they don’t the Federal Reserve should use its own supervisory authority to act,” Merkley said.

The CFTC has also faced criticism from regulators around the world. A committee of Asian regulators that is part of Iosco told the CFTC in a letter on April 9 that swap markets are becoming fragmented because traders outside the U.S. are taking steps to avoid falling under Dodd-Frank, particularly rules requiring deals to occur on new swap execution facilities.

The venues are designed to encourage price competition and transparency between buyers and sellers.

“These reforms appear to have caused market disruptions,” Ashley Alder, chairman of the Asia Pacific committee and chief executive of the Hong Kong Securities and Futures Commission, said in the letter. “Regulators should defer to each other where the quality of their respective regulations and enforcement regimes achieve similar regulatory outcomes.”

In an e-mail, the secretariat of Iosco said the organization couldn’t provide immediate comment.

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