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International regulators prepared to challenge CFTC’s cross-border actions

Gary Gensler

International financial institutions and regulators are poised to fight back against recent proposals by the Commodity Futures Trading Commission that seek to expand the regulatory reach of Dodd-Frank.

Earlier in July, the CFTC voted in favor of proposals that allow foreign regulators to supervise swaps at the entity level while U.S. swaps regulation would still apply at the transaction level.

“We are particularly concerned with potential CFTC margin requirements for swaps that are not cleared through a central counterparty,” Patrick Raaflaub, the CEO of the Swiss Financial Market Supervisory Authority, commonly known as FINMA, and Mark Branson, FINMA’s banking head, said, IFR Asia reports. “If such margin requirements are applied to a Swiss-based entity, this may duplicate the requirements and may possibly conflict with international and domestic capital adequacy rules, thereby producing inefficiencies. Due to [this] concern, we cannot exclude that FINMA may have to deny financial institutions permission to supply certain information or grant direct access to U.S. supervisors.”

FINMA’s statement could imply the beginning of a power struggle between international and U.S. regulatory agencies. Even if CFTC Chairman Gary Gensler were to mandate that Swiss banks must comply with Dodd-Frank regulations, FINMA could deny the banks the ability to do so.

Swiss banks have also voiced concern regarding the international application of Dodd-Frank rules. Markus Diethelm, general counsel at UBS, noted those concerns in a June 13 letter.

“I also note that you seem unwilling at this time to share our belief that tailoring UBS AG’s swap dealer registration to the Investment Bank division and relevant branches that conduct swap dealer activities would be adequate to address the CFTC’s considerations for regulatory oversight,” Diethelm said, according to IFR Asia.

While international backlash has been widely publicized, resistance to CFTC proposals is also a domestic concern. Gensler had to overcome opposition from five CFTC commissioners in order to move forward with the cross-border regulatory proposals.

CFTC Commissioner Scott O’Malia said that the proposals “step on the toes of other sovereign nations,” IFR Asia reports.

In order to pass the proposal, Gensler softened his position to allow foreign swaps and U.S. subsidiaries to comply with local, rather than U.S., regulatory requirements at the entity level, though Dodd-Frank rules will be applicable at the transaction level to “all U.S. facing transactions,” according to IFR Asia.

European Commissioner Michel Barnier of the Internal Market and Services division has also called on Gensler and the CFTC to consider the impact of applying Dodd-Frank regulations to foreign markets.

“The U.S. has shown initiative in developing rules for the derivatives market,” Barnier said, IFR Asia reports. “I now call on U.S. authorities to show leadership in applying them fairly. [U.S. regulators] must be prepared to rely on equivalent rules in host countries.”

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