By Douwe Miedema
WASHINGTON, July 12 The top U.S. derivatives
watchdog voted on Friday to allow U.S. banks operating overseas
to be governed by foreign rules in some cases, soothing Wall
Street concerns that banks might have to comply with both U.S.
and foreign regulations.
The Commodity Futures Trading Commission adopted the plan in
a public vote a day after it ended a months-long trans-Atlantic
rift with European regulators over how to address the complex
issue of cross-border trading of derivatives.
Under the CFTC's guidance, foreign branches of U.S. banks
will be allowed to operate under other countries' regulations
for some trading rules, though the CFTC will first determine
whether these are sufficiently tough.
The CFTC, headed by former Goldman Sachs banker Gary Gensler
, also granted banks a period of delays during which the
new rules would be phased in.
"The far-flung operations of U.S. financial institutions
have to comply with Dodd-Frank, though at times it might be
through comparable regimes elsewhere," Gensler said. Dodd-Frank
is the 2010 U.S. Wall Street reform law.
The CFTC would start determining for each of a large group
of trading rules whether other jurisdictions - such as the
European Union, Japan, Switzerland and Hong Kong - were
comparable with U.S. rules over the coming months.
Regulators are cracking down on the $630 trillion swaps
market, which mushroomed into a vast playground for speculators
from modest beginnings in the mid-1980s to become one of the
main arenas of the 2007-09 credit meltdown.
The CFTC's so-called final guidance was the last major piece
of a raft of new rules the agency is writing in an effort to
make the derivatives market safer.
The plan contained no major shifts from what the CFTC
proposed a year ago, lawyers said, though much of the impact on
the market would depend on the wording of the final version,
which will be published in the coming days.
"I'm sure it's a few hundreds pages and we only got the
highlights, but it sounds like to a significant extent it's
similar to where they were at the beginning," said Joel Telpner,
a New-York based partner at law firm Jones Day.
Investment banks such as Citigroup, JPMorgan Chase
and Bank of America, which dominate the
lucrative derivatives market, had been anxiously waiting to see
the finer print of the rules.
The Institute of International Bankers, a lobby group, said
the CFTC had come up with a "workable approach."
The CFTC's only Republican commissioner, Scott O'Malia, who
at times was visibly irritated, was the only to vote against the
The European Union's financial regulation commissioner,
Michel Barnier, bank lobbyists and a growing chorus of U.S.
politicians had been urging Gensler to rely more on foreign
regulators who are drawing up similar rules.
Gensler, who had been insisting that foreign companies
should comply with CFTC rules if they trade risky derivatives
with U.S. firms, unexpectedly announced a last-minute agreement
with Barnier this week, giving him a big bargaining chip to push
the deal through his own agency.
Under that compromise, a non-U.S. bank could opt to comply
with U.S. or European law, depending on whether it executed a
trade on a platform in the United States or abroad and provided
that European rules for such platforms were in place.
Friday's plan will close a loophole that had allowed New
York hedge funds to avoid most of the CFTC's rules because their
funds are incorporated in the Cayman Islands, which means they
are not U.S. persons by law.
The guidance also provided a phased-in approach of the new
rules, giving the banks 75 days after the plan was filed in the
federal register to adapt their systems, and many more months
for specific other rules.