By Douwe Miedema
WASHINGTON Dec 20 The United States granted
foreign banks a reprieve from some of its new rules for risky
derivatives, putting itself on a collision course with overseas
regulators who want more reliance on home-country rules.
The U.S. swaps regulator laid out which of its new rules
foreign banks have to comply with if they trade with American
clients, or even if they deal with customers in their own
country from an office in the United States.
The Commodity Futures Trading Commission granted exemptions
in the area of how banks manage risk, but banks will largely
need to comply with the cross-border rules for data reporting,
swaps trading, and for clearing trades.
That is bound to disappoint foreign regulators, who had
asked for more so-called substituted compliance, a legal concept
that allows U.S. regulators to rely on foreign regulators for
The CFTC did say however, that it could still make changes
in the future, if it were asked to do so.
"To the extent that a jurisdiction wishes to knock on the
door of this Commission ... (it) stands ready to consider those
submissions," CFTC Chairman Gary Gensler said on a conference
call with journalists.
The lucrative swaps market, which was long unregulated, has
$630 trillion worth of contracts outstanding and is dominated by
Wall Street banks such as Citigroup Inc, Bank of America
Corp and JPMorgan Chase & Co.
Politicians across the world agreed to clamp down on Wall
Street after the 2007 to 2009 credit meltdown, but different
countries have since worked on rules that are not always
identical, and that have different time frames.
Under the chairmanship of Gensler, who himself oversaw swaps
trading at Goldman Sachs earlier in his career, the CFTC
has aggressively implemented these new rules, sometimes putting
it years ahead of other jurisdictions.
It had temporarily lifted many of its rules, but they kick
back in on Saturday, and the decision determines in which cases
foreign banks can rely on comparable rules at home.
The three Democrat members of the CFTC voted in favour of
the determination - which is valid for Europe, Australia,
Canada, Hong Kong, Japan and Switzerland - while the only
Republican, Scott O'Malia, dissented.
Wall Street groups sued the CFTC this month, hoping to beat
back the cross-border guidelines that they fear may hurt markets
and cut profits.
Europe and regulators elsewhere have also frequently
complained about the lack of cooperation, writing several
letters to U.S. authorities and testifying in U.S. Congress and
during hearings at the CFTC.
Two sources close to the European Union said earlier in the
day that Brussels was still unhappy with the CFTC's plans, and
that the same was true for other jurisdictions.
The spat over how to regulate the market looms despite the
"Path Forward" deal struck between the European Union and the
CFTC in July, when the two sides said they were confident they
could hammer out an understanding.
But in recent negotiations, "the (U.S.) colleagues were
saying: 'Yes that's what we wrote, but it is a complex matter
and you've misinterpreted it," one of the sources said.
The source also criticised that the CFTC had not drawn up
Memoranda of Understanding, documents that say how it cooperates
with foreign regulators.
In Friday's determinations, the CFTC did not grant
substituted compliance for clearing, rules for which are not yet
in place in the European Union.
It also did not address rules for trading on exchange-like
platforms, which will kick off next year, even though the agency
did give the banks some more time to meet some of the
obligations for data reporting.
It did allow use of the foreign rules in areas such as
requirements for business continuity, chief compliance officers,
risk management programmes and other such so-called entity-level
"It was my hope that the Commission would work with foreign
regulators to implement a substituted compliance process that
would increase the global harmonization effort. I am
disappointed that the Commission has failed to implement such a
process," said the CFTC's dissenter, O'Malia.