Published December 21, 2012
WASHINGTON – The top U.S. derivatives regulator on Friday gave foreign banks more time to meet new derivative trading rules that had earlier sparked fears that international financial markets could pull away from U.S. banks.
The Commodity Futures Trading Commission (CFTC) said that foreign banks now had until July 12, 2013, to comply with the rules and said it would continue to fine tune the regulations that have also drawn the wrath of foreign regulators.
"The relief period provides time for the Commission to work with foreign regulators as they implement comparable requirements," CFTC Chairman Gary Gensler said in a statement.
Countries worldwide are drawing up rules for the $650 trillion swaps industry to mend flaws brought to light by the 2007-09 financial crisis, bringing trading onto regulated platforms and making data public.
The CFTC had been facing a year-end deadline by which it needed to decide how its rules apply overseas or delay them. It had drawn flak from regulators in Asia and Europe about the blunt way it imposed its rules on banks abroad.
The delay is "very much an interim process to buy everyone a little bit of time," said Gareth Old, a lawyer at Clifford Chance in New York.
It will "allow the coordination between regulators, and permit the dealers and their counterparties to adapt to the changes that are going to be coming into place," he added.
Non-U.S. regulators are saying they are already working on similar rules as the U.S. agency, and the potential doubling up of the rules has sparked fears foreign banks could stop trading with U.S. counterparties.
When an earlier deadline loomed in October, several European banks ordered their brokers to rein in and even quit trading some derivatives with U.S.-based peers, in a protest against the tough new American rules.
"It is important that the CFTC continue to provide relief to avoid confusion in the market, like that market participants experienced on and around October 12th," the Securities Industry and Financial Markets Association (SIFMA) banking lobby said.
The CFTC has drawn criticism over the overly aggressive way in which it is implementing the Dodd-Frank regulatory overhaul of Wall Street, which has so far this year forced it to send out more than 50 letters granting temporary reprieves.
So far, the CFTC has completed two-thirds of the rules Congress told it to write, putting it well ahead of other agencies who are similarly executing Dodd-Frank, such as the Securities and Exchange Commission.
Global regulators meeting in New York last month failed to hammer out a deal on how to jointly supervise the lucrative derivatives market, and how to rely on each other for foreign entities operating in their jurisdictions.
A group of U.S. lawmakers across the political divide on Thursday urged the CFTC to decide quickly how its rules apply abroad, or risk disrupting derivatives markets.
In its present order, the CFTC said it would continue to seek comment on how to define a U.S. person - a hotly debated issue among lawyers because it determines how much leeway foreign banks have to trade with U.S. banks.
Foreign banks must stick to the same rules as their U.S. market parties if they want to do business with a U.S. person, which includes companies, if their swaps trading volume exceeds $8 billion a year, according to the CFTC's proposed rules.
For now, the CFTC would continue to use a narrow definition that was largely similar to the one it used in an earlier temporary reprieve on October 12, which gave the foreign banks more exemptions than in its original rule in July.
"It's a bit of a mixed bag. The U.S. person definition is narrower than the original proposal, but broader than the ... (October 12) letter," said Clifford Chance's Old.
Republican Commissioner Jill Sommers disagreed with the agency's decision, the only dissenting vote among the CFTC's five top officials, three of whom are Democrats.
"Foreign entities will not have the basic information they need to make informed decisions regarding the ultimate obligations of engaging in swaps activities with U.S. persons (the definition of which continues to shift)," she said.
"There is no reason why the Commission could not have issued broader relief until these issues are settled. We have simply chosen not to," she added.
(Reporting by Douwe Miedema; editing by Gerald E. McCormick, Alden Bentley and G Crosse)