Europe Seeks CFTC Delay in Imposing Swaps Rules on Banks

The European Union is urging the U.S. to allow time for international talks before it imposes swaps rules on EU lenders, saying that the current timetable would lead to the banks facing extra costs.

The European Commission wrote to Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, urging him to extend a temporary exemption for overseas banks, which is scheduled to expire on July 12, according to a copy of the letter obtained by Bloomberg News.

The EU wants the exemption to be maintained until “international principles on cross-border swap rules have been agreed by G-20 leaders and implemented in our respective jurisdictions,” according to the letter from Jonathan Faull, the commission’s director general for internal market and services, and Steven Maijoor, chairman of the European Securities and Markets Authority.

An extension is needed to “avoid any possible legal uncertainty and unintended consequences” from overlapping national rules, they wrote. “EU firms would face huge legal and operational uncertainty.”

The international reach of CFTC swap trading requirements has been one of the most controversial elements of the agency’s Dodd-Frank Act rules, prompting opposition from financial companies including Goldman Sachs Group Inc. and Barclays Plc.

Extra Costs

The CFTC has also faced criticism from European and Asian regulators over the reach of a rule requiring trades to be guaranteed at clearinghouses and traded on exchanges or other platforms, with nations warning of overlapping requirements and extra costs for their banks.

“A globally harmonized approach to cross-border regulation is of paramount importance,” Stephen O’Connor, chairman of the International Swaps and Derivatives Association, told U.S. lawmakers last week, according to a published copy of his remarks.

There is a risk that “market participants will be subject to duplicative and/or contradictory regulatory mandates from the EU and other non-US jurisdictions that would impose significant costs, fragment market liquidity and potentially create an uneven playing field,” he said.

Temporary Exemption

Under a temporary exemption granted last year, foreign-based banks and overseas operations of U.S. banks don’t need to count trades they have with non-U.S. clients to determine whether they cross the threshold requiring registration with the CFTC. The agency also sought additional public comment on how to define U.S. entities and foreign branches of U.S. companies.

Michel Barnier, the EU’s financial services chief, said earlier this week that he will travel to the U.S. in mid-July for talks with regulators.

“We are confident that there is a way forward,” Chantal Hughes, a spokeswoman for Barnier, said in an e-mail. The EU and U.S. “dominate the global market when it comes to financial services,” she said. “That is why it is so important that we work closely together to ensure a level playing field and avoid regulatory overlaps.”

It’s “clear we need to find fair a workable outcome,” Sharon Bowles, chairwoman of the parliament’s economic and monetary affairs committee, said in an e-mail. An extension of the temporary reprieve for overseas banks would be “fully in line with Dodd-Frank,” she said.

FSB’s Carney

Mark Carney, chairman of the Financial Stability Board has said that the FSB will report to the G-20 in September on efforts by regulators to resolve “outstanding cross-border issues” for swaps regulation, “including gaps, overlaps and inconsistencies.” The FSB brings together regulators, central bankers and finance ministry officials from G-20 nations.

Bloomberg LP, the parent company of Bloomberg News, has filed suit against the CFTC challenging one of the agency’s proposed swaps rules.

The EU is also guilty of seeking to apply its financial regulations beyond its borders, Syed Kamall, a U.K. lawmaker in the European Parliament said.

“When the EU pushes extra-territoriality in its financial rules, it should come as no surprise when the U.S. seeks to do this with its regulations,” he said in an e-mail.

“Until we are able to reach global agreements, the sad reality is that the patchwork of regulation being implemented across the countries of the G-20 will lead to regulatory arbitrage, which businesses will seek to exploit,” he said.

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