NEW YORK, Nov 9 (IFR) - On the heels of an international
meeting regarding the international reach of Dodd-Frank, French
banks are leading the European charge to sound the alarm that
specific disclosures set to hit in 2013 will force them to make
certain representations to regulators that could leave them open
to regulatory enforcement action.
Beginning January 1, French banks signing up to be swap
dealers in the US will be asked to provide disclosures and
allowances to the Commodity Futures Trading Commission that
violate European privacy laws and French regulatory blocking
statutes, either of which could leave the door open for
Lawyers at European banks say the CFTC has acknowledged the
issue privately and so they have a degree of confidence the
Commission will not overreach. But opinions are wide-ranging
considering the CFTC's recent history.
"It's difficult to predict whether the CFTC would be willing
to stretch its enforcement arms, if you look to the past they
haven't been afraid to do so before," said Felix Shipkevich,
partner at derivatives-focused law firm, Shipkevich.
"I think it's premature to say the agency definitely won't
penalise foreign banks [for this], I think we're just going to
have to wait and see."
As part of a global investigation into Libor fixing
allegations, the CFTC recently settled with Barclays for US$200m
for manipulating its submissions.
It also began legal proceedings against the Royal Bank of
Canada for what it described as "a wash trading scheme
of massive proportion" in April this year. The Commission
alleges that Canada's largest bank engaged in hundreds of
millions of dollars work of futures trades to lock in tax breaks
on dividend payments.
Both were considered aggressive moves for an agency with a
relatively meek enforcement history.
The issue is not specific to France. Banks in Luxembourg,
Switzerland, Singapore, and Korea are having similar issues
according to market participants. But French banks are also
dealing with a blocking statute put in place by local
regulators, which states that the home regulator must first
approve the dissemination of certain swaps information before
being released to other international regulators.
The CFTC's swap dealer registration form requires
international banks to promise to give up any and all
information, with no stipulation for dealing with regulatory
counterparts across jurisdictions.
"We are intending to be very, very, transparent with both
French and US regulators," said a senior counsel at a French
bank based in New York. "But we are not intending to agree to do
anything that would be in violation of our home local laws. How
that ends up coming through in application, I don't know."
The CFTC could apply temporary solutions such as no action
letters or even informal understandings, said the general
counsel at another French bank, who plans to attach a letter to
the registration form explaining the situation if no formal
guidance is provided.
But the lack of a guarantee is proving a headache for bank
lawyers, who remain sceptical of any form of regulatory guidance
that is not formalised, particularly with a regulator that is
clearly upping its game on enforcement.
"Even if the CFTC said 'Don't worry just do your best,' I
don't think anyone would take a particular comfort from that,"
said a lawyer at a US industry trade group. "Until you get it in
writing, that's not anything a lawyer can rely on."
International law firms such as Clifford Chance are in the
process of cataloguing all of these so-called 'conflicts of law'
so as to formally present the depth of the issue to the agency
and to assist banks in understanding jurisdictional regulatory
On Wednesday regulators from Japan, Europe, and Hong Kong
met with the CFTC to voice concerns about how far the agency
plans to stretch its implementation of Dodd-Frank. There is no
definite date for the completion of the guidance.
(This story will appear in the Nov 10 issue of the
International Financing Review, a Thomson Reuters publication)
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