February 8, 2012 / 5:05 AM / 8 years ago

Banks to slam wide reach of Dodd Frank swap rules

* House panel to examine scope of U.S. swaps rules

* Barclays, JP Morgan to testify on hurdles

* Bill to rein in broad swaps scope will be discussed

By Alexandra Alper

WASHINGTON, Feb 8 (Reuters) - Foreign and U.S. banks plan to warn lawmakers on Wednesday that broad application of U.S. swaps rules could undermine U.S. competitiveness abroad, increase the cost of hedging and even provoke brinkmanship among international regulators.

The 2010 Dodd-Frank law, which aims to curb excessive risk-taking on Wall Street, gives the Commodity Futures Trading Commission new oversight powers for the opaque $700 trillion derivatives market.

That includes broad authority to regulate any swaps activities overseas so long as it has a “direct and significant” impact on U.S. commerce.

The CFTC has been mostly silent on the reach of its new swaps rules.

But concern over swaps jurisdiction gained momentum last April when banking regulators proposed a rule on margin and capital for uncleared swaps that appeared to impose tough Dodd-Frank rules on U.S. bank branches in other countries, while exempting their foreign competitors.

Such a framework would “eviscerate our ability to serve clients overseas and cede the global market to foreign competitors who would not be subject to these rules,” Don Thompson, managing director at JPMorgan Chase & Co, will tell a House Financial Services subcommittee, according to his prepared testimony.

Thompson posed the case of a French pension fund, which would not have to post margin if it entered into a swap transaction with a European or Asian bank. If Dodd-Frank requires U.S. banks to seek collateral from the same pension fund, “we will simply lose this business.”

The hearing aims to examine the challenges posed by overseas application of Dodd Frank swaps rules and to explore a potential legislative fix.

Chris Allen, managing director at Barclays Capital, will warn that a broad application of the rules could lead to overlapping or even conflicting regulation from foreign regulators, who may be tempted to retaliate against broad U.S. rules, by applying their own rules in a far reaching way.

His prepared testimony cites a recent European draft of swaps legislation which contains language strikingly similar to the broad scope that Dodd-Frank grants the CFTC.

“This could result in reciprocal foreign regulatory oversight in U.S. markets,” said Allen.

Allen argues that foreign banks may spin off subsidiaries or refuse to trade with U.S. counterparties, in a bid to escape the rules.

That could raise the cost of hedging and make it harder for end-users - such as energy firms, farmers and airlines - to access global markets.

“At a time when U.S. regulators already must make difficult trade-offs to regulate domestic markets effectively, making them responsible for ensuring compliance with... U.S. rules in the context of wholly foreign transactions... raises serious concerns” Allen said in his written testimony.

The capital markets subcommittee will also discuss a bipartisan bill proposed by Connecticut Democrat Jim Himes to limit the reach of Dodd-Frank swaps rules. The bill would require all swaps to be reported to a central data repository, but exempt swaps between foreign branches of U.S. banks and foreign counterparties from some Dodd-Frank regulations.

Both Allen and Thompson support the bill.

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