WASHINGTON A trans-Atlantic rift over derivatives could be ended by an offer from the U.S. swaps regulator that would spare foreign banks from some tough U.S. rules, according to two people briefed on the matter.
Gary Gensler, head of the U.S. Commodity Futures Trading Commission, triggered a rift with Europe last year by insisting that foreign companies should comply with the agency's rules if they trade risky derivatives with U.S. firms.
European politicians, banks and Republican commissioners at the CFTC complained about this aggressive stance, saying the swaps and futures regulator should instead recognize similar foreign rules, as long as they are comparable.
Gensler has since drafted a compromise for the so-called cross-border rules, one of the people said. It includes phased-in compliance and would potentially spare foreign banks from some of the toughest U.S. rules.
It is this compromise that Gensler is trying to sell to Europe ahead of a CFTC meeting on the matter on Friday.
"For now, it's looking good," a second person said of the talks between Gensler and two top aides of Michel Barnier, European Union financial services czar. "It could be done by (Monday) night or on Tuesday."
The two sides are working to boil down the compromise to fit on one page, to ensure its clarity and simplicity, this person said.
The CFTC declined to comment. Barnier's office did not return a request for comment.
The stakes are high, with banks heavily lobbying against new rules to rein in the $630 trillion market, dominated by Wall Street banks such as Citigroup Inc. (C.N), Bank of America Corp. (BAC.N) and JPMorgan Chase & Co. (JPM.N)
Big foreign banks such as Deutsche Bank AG (DBKGn.DE), Credit Suisse Group AG CSGN.VX, Barclays Plc (BARC.L) and others feared they would have to deal with the cost of both U.S. rules and those from their home countries.
The rules, which include trading requirements such as registration and data reporting, would make swaps markets less opaque after the credit meltdown and prevent risk affecting U.S. companies from building up abroad.
CHOICE OF OPTIONS
The compromise being discussed among Gensler and Barnier's aides involves the platforms on which trading takes place. It also would allow foreign firms some flexibility when trading with U.S. clients and remove some of the toughest regulatory requirements, the two people said.
Both stressed that talks are continuing and a deal could yet fall through. Also, Gensler still needs to secure two other votes from fellow CFTC commissioners. Still, having a deal with Europe could be a powerful negotiating tool for Gensler to sway the commission, the second person said.
"Gary is trying to do a deal with other countries, in particular with the European Union, and he's trying to sell that as a fait accompli to the others." Asia is the other major jurisdiction that could benefit from the deal.
Friday's meeting is scheduled on the last day before a broad exemptive relief for foreign companies expires.
In one example of how a compromise would work, 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.
In another example, the trade could be executed on a European platform that was already registered with the CFTC as a so-called Foreign Board of Trade.
"That's one way that we've agreed to. The only thing is we're not sure that goes far enough," the first person said, adding that other problems were also still outstanding.
In both cases, the bank's own requirements such as data reporting, registration with authorities and putting in place clearing requirements would be less cumbersome.
It is not clear whether Gensler can count on the vote of Mark Wetjen, a fellow Democrat commissioner who has launched a rival plan that would allow the agency more time to work on the rules, while temporarily adopting them.
"We're not quite there. We're hoping to get there (on Monday) some time, just because we're running out of time. We are very, very nervous about catching all the issues," the first person said of the CFTC discussion.
Bart Chilton, the third Democratic commissioner, has already said he welcomed Gensler's plan as an "appropriate compromise" because it contained a component to phase in compliance, which he had been urging.
(Reporting by Douwe Miedema; Editing by Karey Van Hall, Andre Grenon and Dan Grebler)