Dodd-Frank Overseas Swap Guidance Approved After Europe Deal

The top U.S. derivatives regulator approved final guidelines allowing greater reliance on overseas rules for cross-border trades a day after breaking an impasse with European authorities on how to oversee the $633 trillion global swaps market.

The Commodity Futures Trading Commission, meeting in Washington, voted 3-1 to complete guidelines allowing many cross-border trades to be governed by overseas rules when they’re comparable to U.S. rules. The document will determine how dozens of regulations increasing collateral and conduct standards apply to the trades by JPMorgan Chase & Co., Goldman Sachs Group Inc., Barclays Plc. and other banks and hedge funds.

“We have to remind ourselves that the largest banks and institutions are global in nature and that when a run starts in any part of an overseas affiliate or branch of a financial institution risk comes crashing right back to our shores,” CFTC Chairman Gary Gensler said at the meeting.

The overseas reach of the CFTC’s rules has been one of the most controversial aspects of the three-year effort by U.S. regulators to improve oversight after largely unregulated trades helped fuel the 2008 credit crisis. The law calls for most swaps to be guaranteed at central clearinghouses and traded on exchanges or other platforms.

The agreement was being considered a day after U.S. and European officials announced they had reached a deal on how to jointly oversee the market. Their agreement broke a deadlock on the reach of the CFTC’s rules, which generated opposition from European and Asian regulators for more than two years.

Overseas Criticism

Gensler was criticized by foreign officials and banks for overreaching and seeking to apply Dodd-Frank Act regulations to too expansively in cross-border trades. Gensler said the 2008 downfall of American International Group Inc., which booked many swaps in London, demonstrated the need for the cross-border reach of regulations to protect taxpayers from risks exposed overseas.

At the CFTC, Gensler and Mark Wetjen, one of three Democratic commissioners, spent the last week in negotiations to reach an agreement on the final guidance document, which was still being drafted yesterday.

The document makes it less probable that markets will be fragmented than earlier CFTC proposals would have resulted in, Wetjen said in remarks prepared for the meeting.

“A global regime such as the one now contemplated in the guidance is the best means to avoid balkanization of risk and risk management that would have benefited no one,” Wetjen said.

The commissioners also approved, by a 3-1 vote, a separate document phasing in the guidance through the end of the year, with some of the first requirements taking effect in mid-September.

The CFTC will determine when overseas regulations are comparable and comprehensive to Dodd-Frank rules and available for substituted compliance.

“The stark reality is that this Commission is not the global regulatory authority and doesn’t have the resources to support such a mission,” said Scott O’Malia, a Republican commissioner, who opposed the guidance.

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