U.S. regulators temper overseas swaps guidance as lawsuit looms

WASHINGTON Fri Jan 3, 2014 2:15pm EST

Scott O'Malia, Commissioner of the U.S. Commodity Futures Trading Commission speaks during CERAWeek, a high profile world energy conference being held in Houston March 9, 2011. REUTERS/Richard Carson

Scott O'Malia, Commissioner of the U.S. Commodity Futures Trading Commission speaks during CERAWeek, a high profile world energy conference being held in Houston March 9, 2011.

Credit: Reuters/Richard Carson

WASHINGTON (Reuters) - U.S. regulators said Friday they will provide temporary relief to swap dealers affected by a November staff memo that expanded the scope of their power to regulate derivatives overseas.

The Commodity Futures Trading Commission also said it will now give the public 60 days to comment on the November 14 memo, which is at the heart of a lawsuit filed by three Wall Street trade groups last month and set to be argued before a federal judge next week.

In their lawsuit, the groups alleged that the Commodity Futures Trading Commission illegally issued a series of informal guidelines and staff advisories, including the November memo, to govern how U.S. rules should apply to overseas trading.

Doing so, they said, let the CFTC bypass a more rigorous formal rulemaking procedure and seize control of a broader swath of trading activities.

The groups argue that issuing guidance and advisories in lieu of formal rules violates a federal law that governs the process that many U.S. agencies must follow before they can adopt new regulations.

The federal law, known as the Administrative Procedures Act, requires agencies to seek public comments and properly weigh those comments before adopting any new regulations.

In their lawsuit, the Securities Industry and Financial Markets Association (SIFMA), the International Swaps and Derivatives Association (ISDA) and the Institute of International Bankers (IIB) said the November 14 memo was never publicly vetted or properly approved by a majority of the CFTC's commissioners.

Now, as the case is preparing to be heard before a federal judge, the CFTC said Friday it will seek comment "on all aspects" of the staff advisory "in view of the complex legal and policy issues involved."

The agency did not elaborate on why it was seeking comments nearly two months after the document was released.

It also said that in light of the decision to request comments, it would extend relief from the reforms until September 15.

In a sharply worded statement, the CFTC's lone Republican member Scott O'Malia dissented to the decision to seek comments, and accused the CFTC of trying to backpedal in the wake of the rulemaking flaws exposed by the recent lawsuit.

"This is simply a strategic move by the Commission to try to duck blame for consistently circumventing the fundamental tenets of the (Administrative Procedures Act) and failing to adhere faithfully to the express congressional directive to limit the extraterritorial application" of the new swaps rules, he said.

"It should be the goal of the Commission to develop rules that adhere to the APA and ensure proper regulatory oversight, transparency and promote competition in the derivatives space," he added.

The CFTC's decision to seek comment on the cross-border advisory comes on the last day of CFTC Chairman Gary Gensler's tenure with the agency.

Gensler, a former Goldman Sachs banker, played a major role in writing the new swaps rules under the 2010 Dodd-Frank Wall Street reform law.

His aggressive push to bring about tough reforms has won him many enemies on Wall Street, and often irked other regulators who have tried to work with the CFTC.

The Dodd-Frank law calls on U.S. regulators to apply the new derivatives rules to foreign trades if they have a "direct and significant" connection to the United States.

But how exactly to interpret that direction from Congress sparked a major trans-Atlantic dispute, with banks and European regulators accusing the CFTC of being too aggressive in trying to apply its rules overseas.

In July of last year, the CFTC gave final approval to guidance that would generally let the overseas branches of U.S. banks follow foreign swaps regulations, as long as they are roughly comparable to U.S. rules.

However, two subsequent advisories issued on November 14 and 15 amended that guidance by expanding the scope of the CFTC's rules to include swaps that were negotiated in the United States, even if the trades were booked offshore and outside of the U.S. marketplace.

(Reporting by Sarah N. Lynch; Editing by Karey Van Hall and Alden Bentley)