May 29, 2013 8:05 pm

European regulators clash with US over derivatives market reforms

European regulators have clashed with the US over the timing of reforms to the $633tn derivatives market in a letter urging further delays to guidelines that would extend Washington’s reach overseas.

The letter sent on Tuesday is the latest sign of strain over how different countries should split the job of overseeing the global derivatives market. The US, stung by the 2008 bailout of AIG after losses at its London derivatives arm, is seeking broad authority to police foreign trading that puts domestic taxpayers at risk.

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The hardline approach has riled Brussels and governments in the EU and Asia, who fear the US move will scupper global efforts to harmonise rules and will force banks to navigate overlapping and at times contradictory rules. Wall Street banks are also fighting expanded US authorities.

At issue is “cross border guidance”, which would outline how the US would keep tabs on banks and hedge funds whose international swap trading could have a direct impact on the US economy.

Gary Gensler, chairman of the Commodity Futures Trading Commission, is pushing to finalise the guidance before an exemption for foreign market participants expires on July 12, imposing the rules more widely.

“I think we’re on a path to do that [finalise the guidance by July 12], but if we don’t, it’s not a mandated provision from Dodd-Frank,” the financial reform law passed in 2010, he said in an interview before the letter was received. CFTC did not have an immediate comment on the letter.

The CFTC’s five commissioners must vote to approve the guidance. Some harbour doubts about proceeding without international consensus, or without progress on a companion rule recently proposed by the US Securities and Exchange Commission, people familiar with the matter say.

The European Commission urged the CFTC to extend the exemption until leaders of the Group of 20 countries have agreed international principles on cross-border swap rules. Otherwise, “EU firms would face huge legal and operational uncertainty,” said the letter signed by Steven Maijoor, chair of the European Securities and Markets Authority, and Jonathan Faull, head of the European Commission department handling financial services.

The proposed CFTC cross-border guidance would require foreign banks trading with US companies to comply with US transaction rules. Offshore branches of US banks would also be covered, as would US-based hedge funds incorporated abroad. Mr Gensler said the risks evidenced by AIG or last year’s “London whale” trading fiasco at JPMorgan Chase illustrate why Washington needs authority over some trading outside the US.

“If somehow this agency interpreted these words ignoring history, we could blow a hole in the bottom of this reform,” Mr Gensler said in the interview.

In April Michel Barnier, the EU commissioner responsible for financial regulation, and finance ministers from the UK, France, Germany and Japan heaped pressure on Mr Gensler in a stern letter urging Washington to “carefully consider” the international repercussions of unilaterally imposing US rules.

“An approach in which jurisdictions require that their own domestic regulatory rules be applied to their firms’ derivatives transactions taking place in broadly equivalent regulatory regimes abroad is not sustainable,” the letter said.

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