The Dodd-Frank Act established standards for transparency and safety for the previously unregulated derivatives market, but Wall Street may be able to easily circumvent the rules by shifting businesses overseas.
The CFTC is currently drafting rules intended to cover all transactions that could potentially harm the economy, regardless of where they occur. Wall Street banks have many subsidiaries, enabling them to easily shift transactions, while their profits and potential losses will ultimately return to affect the U.S.-based parent company, American economy and taxpayers.
With support from foreign regulators and banks, Wall Street is currently pushing for measures that would scale back the scope of U.S. derivatives enforcement to cover only traders and transactions based in the U.S., a loophole that would encourage financial institutions to move transactions offshore to avoid regulatory enforcement. The derivatives market was partly responsible for the collapse of AIG and the financial crisis of 2009.
“We need strong rules that cover all transactions with an impact on our economy in order to protect us from the perils of unregulated derivatives trading,” Americans for Financial Reform said. “The banks say it should be enough for them to follow the rules of the countries where their subsidiaries are located. But some countries are years away from serious regulation of derivatives, and some see loose rules as a way of wooing business. Exempting companies from U.S. regulation would trigger a ”race to the bottom” as foreign countries compete to become regulatory havens.”