(Updates to confirm rule proposed, adds more information)
By Michelle Price
WASHINGTON, Dec 18 (Reuters) - A U.S. regulator on Wednesday proposed relaxing rules on U.S. firms’ overseas derivatives dealing, replacing a stricter Obama-era proposal that critics said would have curtailed U.S. companies’ foreign businesses, officials told Reuters.
The Commodity Futures Trading Commission proposal should lighten the load for U.S. swaps trading firms, marking another win for the industry under the Trump administration which has been trimming rules introduced following the 2007-2009 financial crisis that it says are too draconian.
Investors use swaps, a type of derivative, to hedge exposure to potential price movements in assets such as currencies and interest rates.
The 2010 Dodd Frank Act introduced strict new swap dealing rules, but nearly 10 years later the CFTC has yet to formalize how those rules apply when U.S. companies deal swaps overseas. Companies have had to rely on a patchwork of CFTC guidance and waivers when deciding how to treat such trades.
In October 2016, then-CFTC Chair Tim Massad formally proposed subjecting a large swath of foreign swap dealing to CFTC rules. He was worried risky foreign trading by U.S. companies could hurt U.S. markets.
But critics said that proposal was too aggressive, affecting deals with little U.S. risk and potentially hampering liquidity in the global swaps market. That rule fell by the wayside after the Trump administration took office.
On Wednesday, the CFTC proposed a slimmed down rule for establishing whether overseas subsidiaries of U.S. firms should be subject to CFTC rules. It will effectively replace Massad’s proposal, CFTC officials said.
The new rules would exempt foreign subsidiaries of U.S. bank holding companies because they are already subject to Federal Reserve scrutiny. They would also exempt U.S. subsidiaries dealing in countries that the CFTC deems to have equally stringent regulations.
The CFTC estimates that less than 10% of global swaps trading takes place outside equivalent jurisdictions.
For foreign subsidiaries of U.S. companies, such as insurers or brokers, operating outside those exemptions, the proposal sets relatively high asset and capital-based thresholds for testing whether they should comply with CFTC rules.
“We must not regulate swaps activities in far flung lands simply to prevent every risk that might have a nexus to the United States,” CFTC Chair Heath Tarbert’s said on Wednesday.
“That would be a markedly poor use of American taxpayers’ dollars.”
The proposal, which is subject to a public comment period, also addresses disparities between the CFTC’s and the Securities and Exchange Commission’s swap rules, long an industry bugbear. (Reporting by Michelle Price; Editing by Richard Chang and Diane Craft)