LONDON The Commodity Futures Trading Commission (CFTC), accused by a top broker in off-exchange financial derivatives of wanting to regulate the world, said on Tuesday new rules will inevitably reach beyond its borders to police the $460 trillion market.
Regulators across the globe face an end of year deadline to turn pledges made by leaders of the G20 group of the world's biggest economies to regulate the market, which is dominated by about 15 major banks such as Goldman Sachs, Deutsche Bank and Morgan Stanley who mostly trade in London and New York.
Under the proposed new rules banks and other users of these derivatives like credit default swaps and interest rate swaps will have to trade on an electronic platform, and clear and report the trades to make markets more transparent and contain risks.
Last week CFTC chairman Gary Gensler said London was a light-touch regulatory "loophole" being exploited by U.S. banks to conduct off-exchange derivative trades and it needed closing with rules from the United States so that taxpayers won't be asked to bail out a U.S. firm that fails there.
His comments raised hackles in Europe where the industry is worried about having to comply with both EU and U.S. rules.
But Ananda Radhakrishnan, the CFTC's director of clearing and risk, told the IDX derivatives conference in London on Tuesday the U.S. Dodd-Frank reform of Wall Street forces it to have regard to overseas markets that have an impact on the United States.
Swaps are a global market and many big institutions have significant swaps operations in the United States.
"We need to find a balance between what the statute (Dodd Frank) dictates and being amenable to the desires of our colleagues around the world," Radhakrishnan said.
The CFTC was due to publish draft rules for foreign banks last week but delayed them, and Gensler has suggested that some of the requirements may be postponed to give overseas regulators more time to develop their own rules.
Consultation on the CFTC draft rules may change Gensler's mind on what their overseas reach may be, Radhakrishnan said.
"The statute gave us, I am trying to be charitable, an uncomfortable task ... We are trying to do our best. I am not sure whether we can say we can have no cross-border reach at all," Radhakrishnan added.
Hannah Gurga, head of European affairs at ICAP, the world's biggest inter-dealer broker of derivatives, said at the conference there was a risk that differing regulation would "re-regionalize" markets.
ICAP has just bought PLUS Markets, a small London exchange it hopes will take on giants such as Deutsche Boerse and NYSE Euronext and is seeking clarity on rules.
"We are looking at the CFTC effectively becoming the global swaps regulator. Maybe that will be a good thing for financial stability but it's something overseas regulators need to be grappling with quite seriously," Gurga said.
Separately, David Lawton, acting director of markets at the UK's Financial Services Authority (FSA), sought to play down Gensler's comments.
There had been a huge amount of regulatory dialogue to forge a common transatlantic approach to derivatives rules although the challenge should not be underestimated, Lawton said.
"We are not at the finishing line yet but I remain optimistic we will get a mutually satisfactory finishing point," Lawton said, adding that there was a need to rely on "substituted compliance", meaning recognizing that another country's rules were equivalent and thus drop attempts to impose regulation on each other.
"In our view this is the best way to reduce a potential conflict of laws. It avoids creating a situation where our or other regulators' rules cannot be enforced effectively owing to a lack of jurisdiction," he added.
Meanwhile Phupinder Gill, chief executive of the CME Group, one of the world's biggest derivatives exchanges, said there was sometimes an assumption in the United States that the rest of the world does not have a clue what they are doing.
"Everybody wants to get clarity from the CFTC. It is an open issue," Gill told the conference.
Detailed rules for implementing the new derivatives laws have yet to be finalized globally but Lawton said "waiting for complete certainty is not a realistic option".
Some buy-side firms, meaning institutional investors and companies that use derivatives to insure against risks, were far from ready and face being "forced on board" at short notice.
The buy side was also relying too much on advice from brokers who may not be proposing solutions that were in the client's best interest, Lawton said.
(Editing by Greg Mahlich)