After years of battling to limit the overseas reach of U.S. swaps rules, Wall Street is beginning to hear a more flexible approach from one of its top regulators.
Timothy Massad, who took over as chairman of Commodity Futures Trading Commission (CFTC) in June, told traders today that it's unreasonable to expect identical derivatives regulations around the world. While the agency is striving to ensure coordination with authorities in Europe and Asia, “there will inevitably be differences,” he said.
Massad's comments reflect a change in tone from his predecessor Gary Gensler, who argued that extending CFTC rules to other jurisdictions was crucial to protecting the U.S. financial system from a foreign-born crisis. The agency will also delay a provision applying the Dodd-Frank Act to U.S. structured trades that banks book through overseas affiliates, Massad said.
“We should strive for rules that are clear and predictable—and that, as much as possible, do not create negative effects on competition,” he said at a Futures Industry Association conference in Chicago.
U.S. banks have said the regulation on overseas swaps trades will hurt their competitiveness and unsuccessfully sued the CFTC to try to block it. The policy, set to take effect at the end of this year, will be postponed to give the agency more time to understand the industry's concerns, Massad said.
The Securities Industry and Financial Markets Association, one of three trade groups that sued the CFTC, praised the decision to delay the policy.
“The sooner the CFTC grants a workable extension, the less of a disruptive impact the impending expiration date will have,” Kyle Brandon, director of research at Wall Street's main lobbying group, said in an email.
The cross-border regulation of derivatives has been one of the most contentious aspects of global authorities' efforts to bring new oversight to the $700 trillion global swaps market. U.S. regulators have moved faster than their counterparts around the world who are seeking to complete rules to have most transactions guaranteed at clearinghouses and traded on exchanges.
In pushing for the extension of CFTC rules, Gensler frequently made the point that swaps traded out of the London unit of American International Group Inc. led to a U.S. bailout of the insurer during the 2008 credit crisis.
Massad told reporters after the speech that the commission has four members “who approach these things very pragmatically.” The CFTC is trying to protect against risks being imported into the U.S., while considering different approaches, he said.
Commissioner J. Christopher Giancarlo, a Republican, said in September that the CFTC started a rift between the U.S. and Europe, and that the relationship needs to be reset.
Commissioner Sharon Bowen, a Democrat, told the futures conference today that the agency should “cement an approach that allows our markets, which are inherently global, to operate competitively and efficiently.
“We need to do so, while also guarding against dangers that may start outside our borders, but flow back to our shores,” she said.
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