UPDATE 3-U.S. CFTC floats overseas treatment of swaps rules

Fri Jun 29, 2012 9:03pm EDT

By Alexandra Alper
    WASHINGTON, June 29 (Reuters) - The U.S. Commodity Futures
Trading Commission voted unanimously behind closed doors on
Friday to propose two key measures outlining how U.S. swaps
regulations will apply overseas.
    The measures had previously been slated for a public vote
last Thursday, but the meeting was abruptly canceled due to
last-minute negotiations between two Democratic commissioners.
    The CFTC was tasked by the 2010 Dodd-Frank financial reform
law with writing a raft of rules to boost transparency and limit
risk in the murky, $650 trillion, over-the-counter swaps market.
    One of the most hotly debated pieces of the new regime is
how broadly U.S. derivatives rules will reach into the overseas
operations of U.S. and foreign banks.
    Regulators have struggled to balance the need for broad
oversight -- to prevent offshore risk from damaging the U.S.
financial system -- with the aim of creating a level playing
field that gives no firm a competitive advantage.
    "We must not forget the lessons of the 2008 crisis and
earlier," CFTC Chairman Gary Gensler said in a statement. "Swaps
executed offshore by U.S. financial institutions can send risk
straight back to our shores."
    One measure proposed by the CFTC gives guidance on which
entities and transactions will be subject to U.S. "entity level"
and "transaction level" rules.
    "Entity level" rules include how much capital is needed to
back a trade, while "transaction level" requirements detail the
amount of collateral a firm must put up for its transactions.
    The second measure would grant U.S. and foreign firms a
delay in complying with certain "entity level" requirements such
as business conduct standards.
    Foreign firms will have 12 months to comply, while U.S.
firms will have until January 2013.
    To take advantage of the delay, foreign firms would have to
register with the National Futures Association and submit a
compliance plan for meeting U.S. or foreign swaps rules. 
    It is not yet clear in practice how aggressive the overseas
reach will be. The guidance will be put out for public comment
for 45 days, while the proposed compliance delay will be put for
30 days of comments.

    HOT DEBATE
    U.S. regulators are first in line to put swaps reforms in
place, which has led U.S. banks to fear their business will move
abroad to firms not subject to tough U.S. rules.
    But U.S. regulators point to recent history to demonstrate
the need for broad regulations.
    "The recent Barclays matter, the JPMorgan loss and many
other illustrations make the case for this far better than
anything else," said Bart Chilton, a Democratic commissioner at
the CFTC. 
    JPMorgan Chase & Co announced a multibillion-dollar
trading loss on a complex derivatives trade, and U.S. and
British authorities fined Barclays $450 million for
manipulating the rate at which banks lend to each other,
reigniting calls for tough banking oversight. 
    Risky derivatives trading at overseas subsidiaries of firms
such as insurer American International Group severely
damaged the U.S. financial system during the 2007-2009 financial
crisis and led to multibillion-dollar taxpayer bailouts.
    Scott O'Malia, a Republican commissioner and frequent critic
of the agency's rules, voted for the measures, but criticized
the guidance as overly broad, and lacking sufficient
collaboration with foreign regulators.  
    "I would like to make it clear that if I were asked to vote
on the proposed guidance as final, my vote would be no," he said
in a statement.
    O'Malia also said he would have preferred that the agency
issue a formal rule instead of guidance. Rules, unlike guidance,
require the agency perform a cost benefit analysis, which have
been fodder for industry suits against the CFTC.
    The Securities Industry and Financial Markets Association
echoed O'Malia's concern.
    "We are disappointed that the CFTC has issued proposed
guidance in an attempt to circumvent the requirement for a
cost-benefit analysis," said Tim Ryan President of SIFMA, one of
the groups that has sued the agency over a cost benefit
analysis.
    The CFTC is not required to issued guidance or a rule about
the reach of its swaps rules.
    A swap is a financial contract in which two parties exchange
cash flows on debt, currencies, or other assets, to hedge risk
or make a profit.
    The guidance and the delay will be available for public
comment for 45 days and 30 days, respectively, after which the
CFTC would vote on the final versions.