The main U.S. derivatives regulator came under pressure to limit the cross-border impact of new swaps rules and delay them for six months from overseas regulators as well as Democratic and Republican members of the Commodity Futures Trading Commission.
The Washington-based agency should provide relief from compliance with Dodd-Frank Act rules while U.S. and overseas regulators discuss how to limit oversight gaps, Bart Chilton, one of three Democrats at the CFTC, and Jill E. Sommers, one of two Republicans, told a House Agriculture Committee hearing on the scope of the rules.
“This would give markets and participants time to comply with the new regulatory environment and also would provide assurance to global markets and regulators that we are not causing unnecessary market disruptions,” Chilton said. The relief should free non-U.S. dealers from having to register with the CFTC for six months when trading with U.S. dealers, he said.
The international reach of the CFTC’s swap rules has been one of the most controversial elements of the agency’s Dodd-Frank rules and has prompted opposition from financial firms including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Barclays Plc. The CFTC has also faced criticism from European and Asian regulators for the reach of a rule requiring trades to be guaranteed at clearinghouses and traded on exchanges or other platforms.
The CFTC needs to “clarify and limit the scope of cross-border applicability,” Samara Cohen, a Goldman Sachs managing director, said in testimony submitted to a House Financial Services subcommittee hearing yesterday.
Patrick Pearson, head of the market infrastructure unit at the European Commission, said the CFTC’s proposed approach to cross-border oversight will harm the market. “This will create conflicts and undue burdens for market participants,” he said at today’s hearing. Without an agreement between countries, “conflicts, inconsistencies and gaps will persist, and we believe that trades will not take place, will not be able to be cleared, and will, at best, be reported in a fragmented manner to repositories.”
Sommers said the CFTC needs to provide the industry more time to facilitate a transition to Dodd-Frank swap regulations that should have a narrower scope. “It should not be enough that a swap transaction involves a U.S. counterparty,” she said at the hearing. “The connection with the U.S. needs to be direct and significant.”
CFTC Chairman Gary Gensler said yesterday that the cross-border reach of some rules is intended to protect taxpayers from overseas risks returning to U.S. markets. “We are committed to working through any instances where the CFTC is made aware of a conflict between U.S. law and that of another jurisdiction,” Gensler said.
During a six-month delay, Chilton said the CFTC should have a narrow, territorial definition of trades with U.S. clients while cross-border negotiations continue. U.S. and foreign dealers should have relief from compliance with conduct standards with clients, he said, and non-U.S. dealers shouldn’t need to register when they’re trading with U.S. dealers during the phase-in process.
“These seem to be common-sense measures that can be taken which would ease the transition to compliance, and reduce incentives for regulatory arbitrage, or race to the thinnest rulebook,” Chilton said.