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 The U.S. swaps regulator has temporarily lifted many of the rules it
drew up after the credit crisis, but they kick back into force on
Saturday, and there is little sign the agency will allow much more
leeway.
With only one more day to go, the Commodity Futures Trading
Commission must also hammer out Memoranda of Understanding,
documents that say how it cooperates with foreign regulators, one of
the sources said.
"It doesn't make sense," the source said. "We're not making any
progress."
The sources said the issue was with all six jurisdictions that deal
with the CFTC, not just Europe. Other financial centers have in the
past also been critical of the agency's strict view on rules abroad.
Politicians across the world agreed to clamp down on Wall Street
after the 2007-09 credit meltdown, but different countries have
since worked on rules that are not always identical and that have
different time frames.
The CFTC has been comparing the rules and will recognize some of
them through a legal concept known as substituted compliance. But
this does not go far enough for the foreign regulators.
The CFTC had been looking at how much it could rely on foreign
rules, but mainly focused on a subset known as entity-level
requirements, Chairman Gary Gensler said in an interview.
These requirements are for risk management, capital adequacy and
chief compliance officers, but not for a host of others that have to
do with trading.
The agency's strict stance may mean that foreign banks have to
comply with U.S. standards as well as those in their own country
when dealing with American clients, or even when they serve European
clients from New York.
The agency in the past year has often issued amendments or temporary
exemptions to its rules days or even hours before it needs to make a
decision, but it is unclear if and when it is planning to do so on
this occasion.
Wall Street groups sued the CFTC this month, hoping to beat back
cross-border guidelines that they fear may hurt markets and cut
profits.
The CFTC did not respond to a request for comment.
PATH FORWARD?
The lucrative swaps market, which was long unregulated, has $630
trillion worth of contracts outstanding and is dominated by Wall
Street banks such as Citigroup Inc, Bank of America Corp and
JPMorgan Chase & Co.
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The spat over how to regulate the market looms despite the "Path
Forward" deal struck between the European Union and the CFTC in
July, when the two sides said they were confident they could hammer
out an understanding.
But in recent negotiations, "the (U.S.) colleagues were saying: 'Yes
that's what we wrote, but it is a complex matter and you've
misinterpreted it," the source said.
The main three issues where the rules apply are data reporting,
routing of trades through clearing houses to reduce counterparty
risk, and trading of swaps on platforms that are comparable with
exchanges.
The CFTC is generally unwilling to budge on these rules, which
mainly fall under the category of transaction-level requirements,
but is more willing to grant substituted compliance for the
entity-level requirements.
"We've asked the CFTC to apply (substituted compliance) to many more
transaction- and entity-level requirements," the source said. He
said the CFTC would allow some foreign rules on the entity level,
but not for transactions.
This matches what Gensler said in the interview this week, when he
addressed how the agency had gone about substituted compliance with
Europe, Australia, Canada, Hong Kong, Japan and Switzerland.
"The bulk of what we've been looking at these last several months is
with regard to the entity-level requirements in these six
jurisdictions," he told Reuters.
He also said the process was a work in progress and that further
determinations could be made later.
(Reporting by Douwe Miedema; editing by
Lisa Von Ahn)
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