CFTC Issues Standards for Regulating U.S. Banks’ Overseas Swaps

The U.S. Commodity Futures Trading Commission agreed to defer to some overseas derivatives rules and left unresolved when many of its most important regulations will be imposed on foreign deals by companies including Goldman Sachs Group Inc. and JPMorgan Chase & Co.

The CFTC yesterday described when rules in the European Union, Japan and four other jurisdictions will be considered equivalent to its own record-keeping and business conduct standards. The agency said some of its data-reporting rules must be met overseas starting in March, while it delayed decisions on whether other trading measures are sufficiently robust to take precedence over Dodd-Frank Act requirements on trades outside the U.S.

“We carefully reviewed each regulatory provision of the foreign jurisdictions submitted to us and compared the provision’s intended outcome to the commission’s own regulatory objectives,” CFTC Chairman Gary Gensler said in a joint statement with Commissioners Bart Chilton and Mark Wetjen. Scott O’Malia, the only Republican CFTC commissioner, dissented.

The decisions are among the last for Gensler, who will step down at the end of December after leading a five-year effort to impose new rules on Wall Street after the 2008 credit crisis. The overseas reach of the rules required by the 2010 Dodd-Frank Act has been among the most contentious issues between banks and Gensler, prompting a lawsuit challenging the CFTC’s authority.

Broad Powers

The rules seek to lower risk and increase transparency by having trades guaranteed at central clearinghouses and conducted on exchanges. Gensler has sought broad powers to apply Dodd-Frank rules to overseas trades, citing financial failures at U.S. companies such as American International Group Inc. that originated abroad.

The decisions released yesterday assess the comparability of overseas rules to determine whether they are strong enough to rely on instead of Dodd-Frank’s rules. The agency reviewed a series of reporting, record-keeping and conduct measures in overseas jurisdictions, including Australia, Canada, the European Union, Hong Kong, Japan and Switzerland.

The agency found a series of rules for banks’ own record-keeping and risk-management standards to be comparable to U.S. rules.

In other areas, the CFTC said overseas requirements weren’t found to be comparable. Data-reporting requirements for price and volume information to centralized swap-data repositories weren’t sufficient and U.S. rules must be applied to trades between U.S. banks’ foreign arms and their overseas clients, the agency said. The agency decided to phase in those requirements between March and December 2014.

More Work

“There is still much work to do between our jurisdictions on access to data,” Gensler said in a telephone call with reporters.

The CFTC put off decisions in other areas, such as capital requirements and regulations for swaps to be traded on new exchange facilities, because neither U.S. nor overseas rules are fully in place.

O’Malia said the agency engaged in flawed policy that leaves “unanswered major regulatory gaps” because of a “narrow rule-by-rule approach.” The CFTC failed to work with foreign regulators to coordinate rules, he said.

Gensler said that the agency could consider granting additional deference when overseas authorities put their rules into effect.

“As things come into place whether on the transaction side, on clearing and data reporting and real-time reporting those could be determinations by this commission in the future,” Gensler said.

July Guidance

The decisions follow a July guidance document that laid out when the CFTC thinks trading by U.S. banks overseas should fall under Dodd-Frank rules or be eligible for substituted compliance with foreign regulations.

Wall Street’s biggest lobbying groups earlier this month joined together to sue the CFTC over the guidance document, seeking to curb the agency’s overseas reach.

The lawsuit -- filed by the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association and the Institute of International Bankers -- said the agency illegally set regulations by issuing guidance and staff advisories rather than formal commission-approved rules.

The case is SIFMA v. U.S. CFTC, 13-cv-1916, U.S. District Court, District of Columbia (Washington).

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