EU says Gensler derivatives rule clashes with trans-Atlantic pact

November 21, 2013 04:57 PM
CFTC chair says rule is necessary to prevent rule evasion

European Union regulators accused the U.S. Commodity Futures Trading Commission of reneging on a trans-Atlantic pact on swaps regulation, saying new curbs on EU- based units of U.S. banks clash with efforts to align rules.

The European Commission is urging the CFTC to reconsider the measure that Chairman Gary Gensler argued is vital to prevent U.S. companies from evading regulations by booking transactions through affiliates based in other countries.

“We were very surprised by the latest CFTC rules which seem to us to go against both the letter and spirit of the path forward agreement,” Chantal Hughes, spokeswoman for Michel Barnier, the EU’s financial services chief, said in reference to an accord struck between EU and U.S. swaps regulators in July. The rules “are another step away from the kind of inter- operable global system that we want to build.”

The EU and U.S. have repeatedly clashed over the global reach of U.S. swaps rules, amid European Commission warnings that the extra-territorial reach of CFTC requirements leaves European banks facing overlapping demands and extra costs. The EU authority and the CFTC sought to ease tensions with the July agreement, which sets out a series of understandings and plans for further work.

The CFTC didn’t immediately respond to an e-mail seeking comment on the EU criticisms.

The two-page CFTC guidance, published on Nov. 14, tells traders that if they are based in the U.S. and arrange, negotiate or execute a deal -- even on behalf of an overseas unit -- they must comply with U.S. regulations.

Market Fragmentation

“We are starting to see the impact of the lack of alignment between EU and U.S. rules on derivatives, in terms of higher costs of transactions and fragmentation of markets,” Hughes said in an interview, without specifying what the commission’s response will be.

Of the dozens of derivative rules being completed by the CFTC, the most contentious have involved how to oversee swaps traded across borders. The biggest banks sometimes trade half their swaps with overseas clients.

Gensler has sought to extend U.S. authority to those transactions, arguing that the global nature of the 2008 credit crisis proved that American taxpayers could be at risk when banks book them in foreign units.

Lawyers have said the new policy gives the CFTC a greater reach to police the swaps market and makes it harder for banks to keep trades away from regulations passed in the 2010 Dodd- Frank Act.

The CFTC rules “are yet another example” of why financial regulation should be included in discussions on a planned EU- U.S. free trade agreement, Hughes said. This would provide “a more formal dispute resolution mechanism for constructively addressing these kinds of issues.”

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