WASHINGTON (Reuters) - The United States should allow overseas firms to follow certain foreign swaps rules instead of the U.S. regime’s, a regulator with the U.S. Commodity Futures Trading Commission said on Thursday.
Democrat Mark Wetjen, the newest commissioner at the CFTC, said his agency must trust other countries to develop their own robust swaps rules as it struggles to determine how broadly to apply its own swaps regulations overseas.
“Reliance on substituted compliance is critically important,” Wetjen said at a conference of the International Swaps and Derivatives Association, a trade group.
He said the law clearly directs the CFTC to have a healthy respect for the sovereign authority of other nations and pointed out that the agency’s limited funding make reliance on other regimes necessary.
“Permitting substituted compliance is not tantamount to abdicating the Commission’s responsibilities,” Wetjen said.
His remarks touched on one of the most contentious aspects of the overhaul of derivatives regulation, mandated by the 2010 Dodd-Frank reform act to boost transparency and limit risk in the $648 trillion over-the-counter swaps market.
During the crisis, risky derivatives trading at overseas subsidiaries of firms such as insurer American International Group severely damaged the U.S. financial system.
But regulators have struggled to write rules that prevent offshore risk from damaging the United States while not giving certain firms a competitive advantage.
In June, the CFTC proposed guidance that would require all transactions with U.S. firms to be subject to U.S. swaps rules but allow some overseas firms to comply with local “entity level” rules, like regulations that dictate how much capital is needed to back a trade.
Foreign regulators would have to meet CFTC standards before firms overseas would be allowed to substitute in the foreign rules.
The CFTC is working to finalize the guidance.
Some in the industry have complained that the guidance is not clear enough and might force affiliates that do few swaps transactions to comply with U.S. swaps rules.
“We believe this interpretation captures a much broader swath of entities than the Commission intended and reaches beyond the jurisdictional limitations of the Commodity Exchange Act,” Deutsche Bank said in a letter last month to the agency.
Wetjen said on Thursday that he has concerns about the clarity, workability and scope of the proposal, without providing more specifics about what fixes are needed.
He also said he was confident the agency’s final guidance would help answer lingering questions.
Reporting by Alexandra Alper; Editing by Dan Grebler