U.S. and European regulators risk a permanent breakdown infinancial markets if they can't end a dispute over transatlanticoversight of the $700 trillion swaps industry, a Commodity FuturesTrading Commission (CFTC) member said.

J. Christopher Giancarlo, in his first speech since joining theCFTC in June, said the U.S. agency should retract some of itsoverseas policies to boost coordination with Europe and prevent atrade war that would imperil economic growth.

“We simply cannot allow uncoordinated regulatory reforms topermanently divide global swaps markets,” Giancarlo said in aspeech prepared for delivery today at a Futures IndustryAssociation conference in Geneva. “I call for this reset to avoid atrade war in financial markets akin to that which worsened theGreat Depression.”

The CFTC and European Union regulators have struggled to alignswap-trading rules after the 2008 credit crisis, when largelyunregulated trades helped fuel the meltdown. Regulators sought newrules to reduce risk and increase transparency by having betterdata on the market and by requiring most swaps to be guaranteed atcentral clearinghouses and traded on exchanges.

Under former chairman Gary Gensler, the CFTC also asserted thatoversight of overseas trading was needed to prevent blow-ups atforeign-trading divisions from threatening banks in the UnitedStates. Billions of dollars in losses at a London-based unit ofAmerican International Group Inc. prompted a taxpayer rescue of theinsurer at the height of the crisis.

Giancarlo, a former executive at interdealer broker GFI GroupInc., said the CFTC overreached in its cross-border policy, whichhas resulted in traders overseas avoiding deals that would lead toU.S. oversight under the 2010 Dodd-Frank Act. Three Wall Streetlobbying groups—representing Goldman Sachs Group Inc., JPMorganChase & Co., and Deutsche Bank AG, among otherfirms—unsuccessfully sued the CFTC seeking to restrict the agency'soverseas reach.

To help restore trading between overseas and U.S. firms, theCFTC should revoke some of the Gensler-era efforts and defer toforeign regulators, Giancarlo said. The CFTC should withdraw aNovember staff advisory that said the agency's rules would apply totrades arranged, negotiated, or executed by employees in the U.S.even if the transaction is held in an overseas office, he said.

“The best route to regulating the trading of swaps in globalmarkets is deference to home-country regulators,” Giancarlosaid.

The CFTC policy has also received criticism from fellowcommissioner Mark Wetjen, who earlier this year said the agencyshould consider changing or withdrawing the advisory. TimothyMassad, the agency's chairman, said in a Sept. 5 interview that theagency was willing to consider changes to the policy, while herecognized the “competitive angles” to the issue. U.S. banks saythe policy puts them at a disadvantage to foreign rivals.

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