WASHINGTON The U.S. derivatives regulator said on Wednesday that Wall Street banks can trade on European platforms that are not registered with the U.S., a decision expected to mainly affect the London market.
The Commodity Futures Trading Commission's announcement came just days before tougher rules governing the $630 trillion unregulated derivatives markets will take effect. The markets were at the center of the recent financial crisis, and the agency is now forcing much of the trading onto regulated platforms in an effort to make them safer.
The rules, which go into effect on Monday, require U.S. banks to trade certain groups of swaps on exchange-like platforms registered with the CFTC. The agency's decision on Wednesday made clear that they can keep trading on foreign platforms even if they are not registered in the U.S., as long as the rules in the platform's country are as stringent as those of the CFTC.
"Focusing on Europe, it is our understanding that the issue of U.S. participation on swap trading venues is ... confined to the UK," CFTC Acting Chairman Mark Wetjen said.
The decision had been anticipated by London firms, which do the bulk of the business with U.S. banks. Only swaps broker ICAP sent in registration paperwork for its London unit to avoid any risk of noncompliance, according to a person familiar with the matter.
The CFTC rules have caused a row in Europe, which lagged behind the U.S. in establishing similar regulations. The CFTC expects the UK's Financial Conduct Authority to have rules comparable to its own in place by March 24.
The CFTC and the European Union's financial services czar Michel Barnier jointly issued Wednesday's announcement, which was part of a 2013 pact laying out how each jurisdiction would deal with compliance issues.
In December, U.S. banks sued the CFTC over the so-called cross-border rules, arguing that U.S. had no jurisdiction over what they do abroad. In that same month, the CFTC granted foreign banks a reprieve from some of its new rules for risky derivatives, a deal that did not go far enough in the eyes of the European Union.
The new U.S. rules require dealers to set aside capital and margin, and much of trading needs to be done through so-called clearing houses to protect the risk if a buyer or seller goes bankrupt, which could cause a market rout.
(Additional reporting by Sarah N. Lynch; Editing by Meredith Mazzilli and Amanda Kwan)