The U.S. Commodity Futures Trading Commission, facing concerns from European and Asian regulators about the scope of new swaps rules, should rely on overseas authorities when possible, Commissioner Mark P. Wetjen said.
"In light of the commission's limited resources, efficient regulation through deference to comparable regulation just makes sense," Wetjen, one of three Democrats on the five-member CFTC, said today in remarks prepared for delivery at an International Swaps and Derivatives Association Inc. conference in New York.
The CFTC's proposal for the international reach of its Dodd-Frank Act rules needs more clarity, and it is "critically important" that the agency rely on a process of letting firms comply with new rules by substituting adherence to regulations enacted abroad, he said.
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Along with the Securities and Exchange Commission, the CFTC has been crafting swaps market rules imposed by Dodd-Frank after unregulated trades helped fuel the 2008 credit crisis. The rules' scope has prompted opposition from overseas regulators and companies such as JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp. and Societe Generale SA.
CFTC Chairman Gary Gensler urged support for a June proposal, citing the need to protect taxpayers from rescuing companies whose overseas trades lead to their downfall.
"During a default or crisis, the risk that builds up offshore inevitably comes crashing back onto U.S. shores, he said June 29 when the proposal was published for public comment.
The collapse of American International Group Inc., which booked credit derivatives in Europe, and more recent losses by London traders at JPMorgan's chief investment office show the need to close potential loopholes in Dodd-Frank, Gensler said.
The CFTC's interpretive guidance allowed for so-called substituted compliance for branches, subsidiaries and other overseas affiliates of U.S. banks when foreign jurisdictions have comparable rules.
''Permitting substituted compliance is not tantamount to abdicating the commission's responsibilities," Wetjen said in his prepared remarks for the ISDA conference. "Should a comparability analysis reveal a gap in another jurisdiction's regulations that poses material risk to our markets, our financial institutions, or our economy, the commission reserves the right to apply Dodd-Frank to swap activities abroad" that have a direct and significant effect on the U.S., he said.
Insufficient Clarity
The CFTC's June proposal failed to sufficiently clarify the reach of the rules and could lead to conflicts, according to letters submitted to the agency by overseas regulators. The letters were sent by the U.K.'s Financial Services Authority, European Commission, European Securities and Markets Authority, Financial Services Agency in Japan, the Bank of Japan, Bank of France and Swiss Financial Market Supervisory Authority.
The Hong Kong Monetary Authority, Monetary Authority of Singapore and the Comissao de Valores Mobiliarios, Brazil's national securities regulator also submitted letters.
Rules defining U.S. entities in the trades are overly broad and could lead to regulatory overlaps, officials with the European Commission and the U.K.'s Financial Services Authority said in letters dated Aug. 24.
"This will lead to duplication of laws and to potentially irreconcilable conflicts of laws for market operators," said Jonathan Faull, the European Commission's director general for financial services. "EU and U.S. firms could face permanent legal uncertainty if this issue is not resolved."
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