Wall Street's bid to rein in U.S. derivatives regulation wasrejected by a federal judge in a significant victory for thegovernment's ability to police trading outside the country.

U.S. District Judge Paul Friedman threw out much of an industrychallenge questioning the legality of Commodity Futures TradingCommission (CFTC) guidelines that extend the regulator's reach intoswap deals handled in the U.K., Japan, and other foreigncountries.

The ruling “vindicates the CFTC's view of its broad authorityoverseas, in response to the 2008 financial crisis,” said JulianHammar, a former assistant general counsel at the agency who is nowof counsel in the Washington office of the Morrison & Foersterlaw firm. “It's an important decision.”

The question of how to apply the CFTC's regulations overseas has been among the mostcontentious issues in a four-year battle pitting the largest banks,including JPMorgan Chase & Co., Goldman Sachs Group Inc., andDeutsche Bank AG, against the regulatory agency.

Under former chairman Gary Gensler, the CFTC asserted thatoversight of overseas trading was necessary to prevent blow-ups atforeign-trading divisions from threatening banks and the economy inthe U.S. Billions of dollars in losses at a London-basedswap-trading division of American International Group Inc. prompteda taxpayer rescue of the insurer at the height of the 2008 creditcrisis.

In his ruling, issued yesterday in Washington, Friedman said theCFTC acted properly under the 2010 Dodd-Frank Act in settingpolicies for the $700 trillion global market.

“Congress has clearly indicated” that the swaps oversightincluded in Dodd-Frank, “including any rules or regulationsprescribed by the CFTC, apply extraterritorially,” Friedmanwrote.

The judge ruled in favor of the industry challenge in one area,ordering the agency to conduct a better analysis of the costs andbenefits of the extraterritorial aspects of 10 different rules.

The lawsuit—filed by the Securities Industry and FinancialMarkets Association along with the International Swaps andDerivatives Association and the Institute of InternationalBankers—was one of the highest-profile challenges to the U.S.efforts to reshape financial regulation after the worst economiccollapse since the Great Depression.

Bank Challenge

Swaps have been traded behind closed doors for decades, andDodd-Frank gave the CFTC power to bring the transactions under U.S.oversight for the first time.

The three trade associations, in a statement, said the rulingleaves uncertainties about how the CFTC rules are applied overseasthat “are of significant concern to market participants.”

The industry has 60 days to appeal the decision, as does theCFTC.

The agency's chairman, Timothy Massad, said in a statement afterthe ruling that he was pleased that the court “rejected a sweepinginjunction of the rules that are at the heart of Dodd-Frank'soverhaul of the swaps markets.”

Massad said the agency would continue reform efforts whileaddressing concerns from lawmakers that risks abroad could threatenthe U.S. economy.

In yesterday's 92-page ruling, the court declined tosecond-guess the CFTC's decision to spell out its oversight asguidance rather than through formal rules as sought by the threeWall Street lobbying groups that filed the suit in December.

While Friedman faulted the CFTC for failing to thoroughly studythe costs and benefits of the 10 rules, he declined the industrycall to vacate them. Throwing the regulations out “would beunnecessarily disruptive to the CFTC's mission and the purposes ofthe Dodd-Frank Act,” the judge wrote.

Advocates of stronger regulations for Wall Street banks praisedthe decision.

“Proponents of financial reform secured a major victory,” saidRepresentative Maxine Waters of California, the senior Democrat onthe House Financial Services Committee. “It is in the bestinterests of American taxpayers that the U.S. District Court hasexpressed an understanding that these efforts to evade importantU.S. regulations are contrary to Congressional intent, and onlyserve to harm consumers and our economy in the long run.”

Marcus Stanley, policy director for Americans for FinancialReform, a coalition including the AFL-CIO labor federation, saidthe decision should bolster the agency's efforts to curb recentsteps by Wall Street to escape Dodd-Frank by shifting theiroverseas trading operations.

“I really hope that this decision is going to stiffen the CFTC'sbackbone,” Stanley said in a phone interview.

The case is SIFMA v. U.S. CFTC, 13-cv-1916, U.S. District Court,District of Columbia (Washington).

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