(Adds detail on banks, background on position limits, quote)
By Douwe Miedema
WASHINGTON, Sept 16 (Reuters) - A U.S. court on Tuesday largely rejected an attempt by banking groups to limit the U.S. swaps regulator’s ability to apply its rules overseas, a hotly debated issue as the agency reins in the $710 trillion global market.
Most of the claims by the three banking groups failed because the law gave the Commodity Futures Trading Commission clear powers to apply a host of new rules to govern the formerly unregulated swaps market overseas, the ruling by a Washington, D.C., federal court said.
While Judge Paul Friedman sent back some of the rules to the CFTC, telling the agency to do a better job in weighing the costs and benefits, he did not invalidate them.
The banks’ challenges “merely seek to delay the inevitable,” Friedman said in his opinion, adding that “Congress has clearly indicated that the swaps provisions (in the 2010 Dodd-Frank Wall Street Reform Act) apply extraterritorially.”
Wall Street is facing an onslaught of new rules after the 2007-09 financial crisis and the CFTC’s so-called cross-border rules became one of several conflicts between the agency and the large banks that dominate swaps trading.
The agency requires that swaps be traded on exchange-like platforms and that they be sent through clearing houses to reduce risk. It has also imposed strict registration and reporting requirements for banks and their clients.
In many cases, these rules also apply when U.S. banks do business through their affiliates abroad and when they deal with foreign clients in the United States, to prevent any risk that emanates abroad from hitting the U.S. parent company.
The Securities Industry and Financial Markets Association (SIFMA), the International Swaps and Derivatives Association (ISDA) and the Institute of International Bankers (IIB) challenged that cross-border policy late last year.
The groups accused the CFTC of avoiding a rigorous rule-making process by issuing less formal guidance, altering rules without public input, and failing to study the costs and economic impacts of the new regime.
Bank of America, Citigroup and JP Morgan Chase and Co are some of the largest players in swaps, products that can be used to hedge against price risk but that are predominantly used by speculators.
The cross-border application of the rules is also the source of a long-running dispute with the European Union, which wants the U.S. to rely more on EU oversight.
The standoff threatens to delay implementation of a global framework that would give supervisors more insight into the risks these once opaque markets harbor, while at the same time allowing banks and their clients to operate across borders.
“This decision is a very big win for financial reform and for transparent derivatives markets,” said Dennis Kelleher, who heads Better Markets, a group urging Wall Street reform.
Banks had succeeded in getting a court to throw out another CFTC rule to cap speculation in commodity markets, using the same argument of a lack of cost-benefit analysis, a requirement of the Administrative Procedures Act. The CFTC has since reproposed those rules for so-called position limits.
The Securities and Exchange Commission - which oversees a tiny corner of the swaps market - is working on its own proposal for cross-border rules.
Swaps were originally designed to protect companies against risks with interest rates or currencies, but they can also be packaged into the types of complex financial transactions that became a problem during the financial crisis. (Reporting by Douwe Miedema; Editing by Karey Van Hall, Grant McCool and Phil Berlowitz)