The main U.S. derivatives regulator should consider revising a policy that helped prompt a lawsuit by Wall Street lobbying groups because it extended the reach of rules to deals arranged in the country but held overseas, the agency’s acting chairman said.
The Commodity Futures Trading Commission should look at changing or withdrawing the November advisory, released under former chairman Gary Gensler, that sought to curb bank efforts to skirt the 2010 Dodd-Frank Act by automatically applying the trading rules to such transactions, Mark P. Wetjen, the acting chairman, told reporters after a speech at a legal conference in Washington yesterday.
The CFTC, which has been in discussions with the Securities and Exchange Commission on the issue, should instead consider greater deference to overseas authorities when there are comparable rules in place, Wetjen said. The change would apply to trades arranged, negotiated and executed by employees based in the U.S. but held in an offshore entity, he said.
“I don’t think it was the right decision,” Wetjen said of the November advisory, which was a further explanation of the agency’s broader July guidance on the overseas reach of regulations. “If you’ve got equally comparable, comprehensive regulations in Europe, as an example, then what’s the reason why we wouldn’t allow for substituted compliance in that situation?”
The overseas reach of Dodd-Frank rules has been among the most contentious issues at the CFTC and prompted a December lawsuit by the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association and the Institute of International Bankers to overturn agency policies. U.S. banks have warned they will be placed at a competitive disadvantage to their foreign-based rivals if Dodd-Frank rules apply to their business overseas.
The industry argued in the lawsuit that two November advisories fundamentally changed the policy the CFTC released in July -- guidelines they said last year that they had already bent over backward to follow. The July policy contained a footnote, number 513, that banks were relying on to keep swap deals off electronic platforms and away from the agency’s rules.
Wetjen became acting chairman after Gensler’s term ended in January. Treasury Department official Timothy Massad has been nominated by President Barack Obama to be the new CFTC chairman and is awaiting a confirmation vote by the full Senate.
The case is SIFMA v. U.S. CFTC, 13-cv-1916, U.S. District Court, District of Columbia (Washington).