WASHINGTON May 21 Foreign countries are being too critical and potentially hurting delicate negotiations with U.S. regulators over how broadly they should apply new over-the-counter derivatives rules to trades that cut across borders, U.S. Treasury Secretary Jack Lew said on Tuesday.
Lew's comments, made during testimony before the Senate Banking Committee in a broad-ranging hearing on regulatory issues, marked a rare occasion where he publicly waded into the thorny debate over cross-border regulations for swaps.
Lew told lawmakers that an April 18 letter to him signed by foreign officials including European Commissioner Michel Barnier was "ill-informed."
In that letter, the finance ministers complained about a "lack of progress" in developing workable cross-border rules with the U.S. Commodity Futures Trading Commission and U.S. Securities and Exchange Commission, the two independent regulators charged with overseeing the $630 trillion over-the-counter market.
"An approach in which jurisdictions require that their own domestic regulatory rules be applied to their firms' derivatives transactions taking place in broadly equivalent regulatory regimes abroad is not sustainable," said the letter, which was signed by nine officials from around the world.
"I did say to them quite directly that it was not a helpful way to promote conversations with two independent regulatory agencies to write a letter like that that didn't even reflect the state of affairs," Lew said, in response to questioning by Senate Banking Committee Ranking Member Mike Crapo.
He added that the SEC and CFTC have been "making real progress" on the issue.
The SEC and the CFTC won broad new powers in the Dodd-Frank law to police the swaps market. A provision in the law calls for them to extend their rules overseas if trading in other countries could have a "direct and significant" effect on the United States.
However, there has been a major debate over how to interpret that provision.
Foreign regulators have voiced strong opposition to an initial proposal put forth last year by CFTC Chairman Gary Gensler, saying it was far too aggressive and could lead to duplicative regulation.
The CFTC has since scaled back the scope of its plan through temporary exemptions.
Meanwhile, earlier this month the SEC released its own proposal for how to address cross-border trades.
The SEC's proposal is considered by most to be a middle-of-the-road approach between what the CFTC proposed and what foreign regulators have demanded.
It has won some praise so far from Wall Street, but was harshly rebuked by liberal groups as well as in an opinion piece in the New York Times, which accused the agency of caving into Wall Street's demands.
The SEC's Trading and Markets Acting Division Director John Ramsay late last week wrote a response to the paper criticizing the op-ed.
"The rules that the SEC has proposed are robust and designed to address systemic risk flowing back to American shores while also promoting strong rules around the world," Ramsay wrote.