Economic scrutiny needed for swaps rules' reach: US regulator

Thu May 31, 2012 6:44pm EDT

* CFTC's O'Malia calls for cost benefit analysis for guidance

* Guidance would shed light on overseas reach of US swaps rules

* Chairman Gensler pointed to JPM losses to show need for broad reach

* Guidance may come as early as June

By Alexandra Alper

WASHINGTON, May 31 (Reuters) - A top Republican regulator on T hursday called on his agency to study the economic impact of guidance it plans to issue as soon as next month that will set the global reach of new U.S. swaps rules.

Scott O'Malia, a commissioner at the Commodity Futures Trading Commission, said a cost-benefit analysis would allow the agency to make an "informed decision" about how broadly to apply new regulations.

"The Commission should do the right thing and conduct a thorough analysis of the costs and benefits of its guidance," O'Malia, a frequent critic of agency rules, said at a conference on the over-the-counter derivatives market in New York.

Industry groups have made the quality of cost benefit studies a cornerstone of their efforts to push back against rules required by the 2010 Dodd-Frank financial oversight law.

O'Malia has sharply criticized prior CFTC analyses, which are required to accompany agency rule makings but not guidance, saying they fail to quantify costs adequately or offer policy alternatives.

His criticism has been fodder for industry lawsuits aimed at striking down unpopular rules.

A legal challenge to the CFTC's position limits rule, brought in December by the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association (ISDA), centers on the inadequacy of that rule's cost benefit analysis and cites critical comments from O'Malia.

REACH OF SWAPS RULES

The CFTC was tasked by Dodd-Frank with reducing risk and boosting transparency in the opaque $708 trillion global swaps market.

Risky derivatives trading at overseas subsidiaries of firms like insurer American International Group severely damaged the U.S. financial system during the 2007-2009 financial crisis and led to multibillion-dollar taxpayer bailouts. It has also prompted some U.S. regulators and lawmakers to push for a swaps regime with broad overseas application.

CFTC Chairman Gary Gensler has pointed to JPMorgan Chase & Co's mounting $2 billion loss -- from trades the bank booked in London -- to highlight the need for a tough overseas swaps regime.

"Some commenters have expressed the view that if a transaction is done offshore, it should not come under Dodd-Frank," Gensler said at a Senate Banking Committee hearing earlier this month.

"The law, the nature of modern finance and the experiences leading up to the 2008 crisis, as well as the reminder of the last two weeks, strongly suggest this would be a retreat from much-needed reform," Gensler said, referring to JPMorgan's losses.

The banking industry and foreign regulators have pushed back, warning that an overly broad regime might duplicate or conflict with rules of foreign regulators, or put certain banks at a competitive disadvantage.

"The guidance should not overreach or step on the toes of sovereign nations," O'Malia said o n T hursday.

Both the CFTC and the Securities and Exchange Commission -- which oversees securities-based swaps -- have promised to release guidance to give market participants clarity on how Dodd-Frank rules will apply to their overseas operations.

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