Cross-Border Swap Dispute Risks Trade War, CFTC’s Giancarlo Says

U.S. and European regulators risk a permanent breakdown in financial markets if they can’t end a dispute over transatlantic oversight of the $700 trillion swaps industry, a Commodity Futures Trading Commission member said.

J. Christopher Giancarlo, in his first speech since joining the CFTC in June, said the U.S. agency should retract some of its overseas policies to boost coordination with Europe and prevent a trade war that would imperil economic growth.

“We simply cannot allow uncoordinated regulatory reforms to permanently divide global swaps markets,” Giancarlo said in a speech prepared for delivery today at a Futures Industry Association conference in Geneva. “I call for this reset to avoid a trade war in financial markets akin to that which worsened the Great Depression.”

The CFTC and European Union regulators have struggled to align swap-trading rules after the 2008 credit crisis, when largely unregulated trades helped fuel the meltdown. Regulators sought new rules to reduce risk and increase transparency by having better data on the market and by requiring most swaps to be guaranteed at central clearinghouses and traded on exchanges.

Under former chairman Gary Gensler, the CFTC also asserted that oversight of overseas trading was needed to prevent blow-ups at foreign-trading divisions from threatening banks in the U.S. Billions of dollars in losses at a London-based unit of American International Group Inc. prompted a taxpayer rescue of the insurer at the height of the crisis.

Avoiding Deals

Giancarlo, a former executive at interdealer broker GFI Group Inc., said the CFTC overreached in its cross-border policy, which has resulted in traders overseas avoiding deals that would lead to U.S. oversight under the 2010 Dodd-Frank Act. Three Wall Street lobbying groups -- representing Goldman Sachs Group Inc., JPMorgan Chase & Co. and Deutsche Bank AG among other firms -- unsuccessfully sued the CFTC seeking to restrict the agency’s overseas reach.

To help restore trading between overseas and U.S. firms, the CFTC should revoke some of the Gensler-era efforts and defer to foreign regulators, Giancarlo said. The CFTC should withdraw a November staff advisory that said the agency’s rules would apply to trades arranged, negotiated or executed by employees in the U.S. even if the transaction is held in an overseas office, he said.

“The best route to regulating the trading of swaps in global markets is deference to home country regulators,” Giancarlo said.

The CFTC policy has also received criticism from fellow commissioner Mark Wetjen, who earlier this year said the agency should consider changing or withdrawing the advisory. Timothy Massad, the agency’s chairman, said in a Sept. 5 interview that the agency was willing to consider changes to the policy, while he recognized the “competitive angles” to the issue. U.S. banks say the policy puts them at a disadvantage to foreign rivals.

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