The U.S. Commodity Futures Trading Commission, already fighting lawsuits challenging the economic basis for two rules, may release a proposal for cross-border derivatives oversight that won't require analysis of its costs.
The CFTC is preparing so-called interpretive guidance on the international reach of Dodd-Frank Act rules that may be proposed at a June 21 meeting, according to two people who requested anonymity because the schedule isn't public.
Releasing guidelines rather than proposing rules to govern trading at banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley would mean the agency doesn't have to do cost-benefit analysis. Financial-industry lawsuits alleging flawed analysis have slowed Dodd-Frank rulemaking.
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"It allows the agency to maintain the highest level of flexibility as the rest of the rules are completed and the rest of the world stands up," Steven Adamske, the CFTC's spokesman, said today in a telephone interview.
U.S. banks have said applying Dodd-Frank rules to their overseas branches would threaten their ability to compete with foreign-based rivals. Imposing the law's margin requirements on non-U.S. swaps would "eviscerate our ability to serve clients overseas and cede the global market," JPMorgan Associate General Counsel Don Thompson said at a House hearing Feb. 8.
CFTC Chairman Gary Gensler said last week that JPMorgan's May 10 disclosure of at least $2 billion in trading losses on credit derivatives shows the need to extend the law's reach.
'Stark Reminder'
The losses are "a stark reminder of how swaps traded overseas can quickly reverberate with losses coming back into the United States," he said in a June 7 speech in New York.
Dodd-Frank regulations should cover transactions with overseas branches of U.S. banks, affiliates that are guaranteed by a U.S. parent company and affiliates that act as conduits for a U.S. entity's swap activity, Gensler said.
"Depending on the extensiveness of the requirements that are going to be imposed through guidance, the CFTC needs to be careful that it complies with its requirements," Donald N. Lamson, Washington-based counsel at Shearman & Sterling LLP, said today in a telephone interview. "It would be ill-advised to avoid a cost-benefit analysis and choose to issue substantive requirements as guidance simply to avoid the exercise," said Lamson, a former attorney at the Office of the Comptroller of the Currency.
The International Swaps and Derivatives Association Inc. and Securities Industry and Financial Markets Association sued the CFTC last year to overturn regulations to limit excessive speculation in commodities markets. The groups argued that the CFTC never studied whether the regulation was "necessary and appropriate" or quantified the costs of implementing the rule.
The CFTC was sued on April 17 by Washington-based lobbying groups seeking to overturn a rule requiring mutual funds with commodities investments to register with the agency. The CFTC didn't properly assess the costs and benefits when it imposed the regulation in a 4-1 vote in February, the U.S. Chamber of Commerce and the Investment Company Institute said in a lawsuit.
A series of legal challenges from business groups against the U.S. Securities and Exchange Commission ended in a federal court ruling last year that the agency didn't adequately analyze the cost of a new rule. In the months since, SEC rulemaking has ground to a near-halt, with just 24 agency economists working full-time to provide analyses for dozens of proposed policies.
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