Wall Street Wins as U.S. Retreats From Foreign Swap Policing
Wall Street Wins as U.S. Retreats From Policing Foreign Swaps
(Bloomberg) -- Wall Street banks scored a major win Thursday as the U.S. Commodity Futures Trading Commission largely retreated from policing derivatives trades that are booked abroad.
The CFTC’s shift to defer more oversight to foreign regulators follows years of industry lobbying. The change means that going forward, the regulator will no longer assert sweeping jurisdiction over global swap trades. That has been the CFTC’s approach since the 2008 crisis, with the agency previously arguing that it was necessary to keep tabs on transactions that could trigger billions of dollars in losses and threaten the U.S. financial system.
Under the rule finalized Thursday, the CFTC won’t directly monitor some transactions that are handled by bankers in the U.S. but are officially settled or booked in firms’ foreign offices. Foreign swaps trades arranged, negotiated or executed by a person in the U.S. had been automatically deemed covered by CFTC rules under a statement that the regulator issued in 2013.
Backers of the CFTC overhaul argue that financial watchdogs in Europe, Asia and other regions have dramatically improved their oversight in recent years. But critics say the CFTC’s pullback may open a giant loophole that allows Wall Street to avoid scrutiny from the regulator by recording transactions overseas, even if a bank holding company in the U.S. is ultimately on the hook for any losses.
Key Details
- Under the rule, a non-U.S. swaps dealer’s activity could fall under the jurisdiction of a local regulator rather than the CFTC, if the U.S. considers the overseas watchdog’s standards “comparable.”
- Credit Suisse Group AG, the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association are among entities that signed letters that were generally supportive of the CFTC revamp after it was first proposed in December.
- The CFTC finalized the rule by a 3-2 vote in a virtual meeting with the agency’s three Republicans in favor and its two Democrats opposed.
- “What we’re doing today is in fact a measure of de-regulation and we wouldn’t be doing that if we didn’t think it was justified,” said CFTC Chairman Heath Tarbert. He added that the new approach lets the agency focus on the most significant risks and reflects a desire to respect global regulators with comparable rules.
- Democratic commissioner Dan Berkovitz said the rule change forgets “the lessons of the 2008 financial crisis and ignores the mandate of Congress.” He added that the CFTC “should not be facilitating migration of our markets overseas and that’s what this rule opens up.”
- The proposal would clarify who’s considered a “U.S. person” for CFTC swaps regulation, using a definition in line with what’s used by the Securities and Exchange Commission.
- The changes could theoretically help some financial firms avoid the costs of registering as swap dealers with the CFTC.
- The final rule also requires that the swaps activity of foreign affiliates of U.S. firms deemed to be a “significant risk subsidiary” would still fall under the CFTC’s direct oversight.
- Republican Commissioner Brian Quintenz said the revamp will avoid “duplicative regulation and disadvantaging U.S. institutions acting in foreign markets.”
- Commissioner Dawn Stump, who’s also a Republican, said the new rules improve on the agency’s 2013 guidance. “They recognize the current state of global regulation and the global interconnectedness of derivatives markets,” she said.
- Democratic Commissioner Rostin Behnam said the rule “relies on broad deference that opens a gaping hole in the federal regulatory structure.”
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