Updated Thursday, April 24, 2014 as of 5:59 PM ET
Portfolio - Investment Insights
CFTC Issues Substituted Compliance Standards for Overseas Swaps
by: Silla Brush
Monday, December 23, 2013
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(Bloomberg) -- The U.S. Commodity Futures Trading Commission, seeking to bolster global oversight of derivatives trading, released determinations for when overseas rules are sufficiently robust to take precedence over Dodd-Frank Act measures on trades in foreign jurisdictions.

The CFTC today approved a “series of broad comparability determinations” describing circumstances when it will consider swaps regulations in the European Union, Japan and four other jurisdictions to be equivalent to its own. The agency postponed decisions on whether other rules are strong enough to govern derivatives trading by companies including Goldman Sachs Group Inc. and JPMorgan Chase & Co.

“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 and Commissioners Bart Chilton and Mark Wetjen, all Democrats, said in a joint statement. “These determinations reflect the Commission’s commitment to coordinating our efforts to bring transparency to the swaps market and reduce its risks to the public.”

Today’s decisions are among the last for Gensler, who will step down at the end of the year after leading a five-year battle to impose new rules on Wall Street after the 2008 credit crisis. The overseas reach of the rules required by Dodd-Frank 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 problems at U.S. companies such as American International Group Inc. that originated abroad.

The decisions released today 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.

Scott O’Malia, a Republican CFTC commissioner, dissented from the decisions, saying that 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.

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.

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