Washington’s Commodity Futures Trading Commission is close to hammering out a deal on cross-border trading of derivatives, a move to reign in risky trading by U.S. banks in London and in other overseas markets.
CFTC Democratic Chairman Gary Gensler has faced opposition from fellow commissioner, Mark Wetjen, a Democratic commissioner, but despite the schism, is not backing down from the oversight.
Firms such as Goldman Sachs International and the London office of Citigroup could come under more scrutiny, according to an anonymous source cited in today’s New York Times. To appease Wegjen, Gensler is expected to phase in the cross-border rules. Any compromise that is reached will not come a minute too soon, as the CFTC’s controversial cross-border derivatives rules are set to kick-in on July 12th. According to today’s New York Times, Wall Street firms will most likely object to the oversight, but they will be relieved to have guidelines. If the agency doesn’t announce a compromise tomorrow, and doesn’t extend the deadline, some banks are worried that uncertainty will lead to confusion.
The topic has been controversial because it’s viewed as extending the agency’s reach and stepping on the toes of overseas regulators. So far, none of the recent media coverage has mentioned the systems changes that may be necessary to view and factor in the positions of cross-border trading affiliates.
"The CFTC’s cross border derivatives rules are highly controversial, and if they come into effect in their current form they will pit the US regulator against its foreign counterparts, affecting every single bank on Wall Street and potentially transforming trading patterns in the global derivatives markets,” commented Zohar Hod, Global Head of Sales & Support, SuperDerivatives, a derivative trading technology provider, who emailed comments to the media.
The plan was devised after the financial crisis when a London-trading unit of American International Group nearly caused the company to collapse, which led to the Dodd Frank Act and its “sweeping overhaul of the $700 million derivatives marketplace. Adding fuel to the fire, JP Morgan’s $6 billion trading loss from credit derivatives, via the London Whale, has strengthened the view that banks are still engaged in risky overseas derivatives trading which needs more monitoring and transparency.
According to The New York Times:
Under that 2010 law, the CFTC is charged with extending the derivatives rules — including tougher capital standards— if overseas trading has a direct and significant connection with activities” of the United States.While the CFTC has made progressing in restoring confidence to OTC derivatives markets, Hod wrote that "the CFTC risks overstepping the mark with this particular piece of legislation, which is viewed by many as a kind of regulatory imperialism."
Rushing to finalize the rules to meet a deadline is not the way to go, further commented Hod, who suggests that it’s more important to collaborate with overseas regulators and avoid regulatory arbitrage.
"Harmonisation of cross-border regulation is the last major issue in the reform of the derivatives industry, and there is still a massive amount of intricate work to be done on a global scale to remove any opportunity for regulatory arbitrage. What is required now is full cooperation and dialogue between the CFTC and regulators around the world, rather than a blind rush to meet an arbitrary self-imposed deadline."
Meanwhile, CFTC has scheduled a public meeting on Friday to vote on the cross-border plan, though the agency could also vote in private, according to the NY Times. But Gensler, summoned a pregnant speechwriter into his office last month to prove a point, appears to be keen on meeting the deadline. He asked the speechwriter's opinion of the deadline, the Times noted. The woman replied “No Delay,” and indeed gave birth last Friday on her due date, which the Times called “a positive omen for Gensler and Wetjen.” However, Wall Street may not see on-time delivery of overseas trading rules as a good thing, except for clearing up the uncertainty.