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CFTC guidance permits banks’ adherence to foreign swaps rules

Gary Gensler

The Commodity Futures Trading Commission voted to approve guidance that would allow U.S. banks and their affiliates to come under foreign regulations if the rules are comparable to those mandated by the 2010 Dodd-Frank Act.

American financial institutions have lobbied for two years against the application of Dodd-Frank regulations to overseas subsidiaries and affiliates, saying that doing so would damage the ability of U.S. firms to compete, according to Bloomberg.

The international implications of Dodd-Frank have been a topic of fierce debate among industry participants. Following the collapse of Lehman Brothers Holdings, Inc., and the bailout of American International Group, Group of 20 nations sought more stringent rules for the regulation of the derivatives market.

Swaps trading has remained a major revenue source for large U.S. financial institutions, some of which have conducted approximately half of those trades overseas, Bloomberg reports.

The guidance issued by the CFTC establishes two rule sets. Entity regulations apply to data record-keeping, capital and internal business conduct policy. Transaction regulations apply to margin, trade execution, the guarantee process through central clearinghouses and sales practices.

CFTC Chairman Gary Gensler said that foreign swap dealers could come under entity-level compliance by adhering to similar rules issued by overseas governments, adding that transaction regulations may not apply to those transactions between counterparties without a U.S. guarantee and U.S. subsidiaries.

“If for some reason, there are not comparable laws of self-interest in nations, and there is a possibility that the lack thereof would be a potential matter of concern to the U.S., our law requires that we address it in an appropriate fashion, and we will do so,” CFTC Commissioner Bart Chilton said, according to Bloomberg.

The original guidance proposal presented last month was issued under the view that the CFTC could wield significant power overseas through what CFTC Commissioner Jill E. Sommers called an “intergalactic commerce clause,” Bloomberg reports.

The European Union has worked with U.S. regulators to align regulatory measures as banks continue to warn against overlapping rules that may give foreign competitors an advantage or increase costs.

The possibility that U.S. regulatory authority could extend into foreign law has sparked opposition from several nations worldwide. Commissioner Michel Barnier of the European Union’s financial services division said last month that the CFTC should “show leadership” and consider the fairness of all rules.

“They must be prepared to rely on equivalent rules in host countries,” Barnier said, according to Bloomberg.

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