One of the perhaps laudable goals of the U.S. Wall Street Reform and Consumer Protection Act (aka Dodd-Frank), generally supported by global regulators, has been to create a more robust regulatory framework for largely unregulated transactions, including swaps and derivatives, blamed for the global financial crisis.
However, one of the more controversial aspects of Dodd-Frank continues to be its potential extraterritorial reach or its application to organizations outside the U.S. (especially if these entities are not ultimately U.S.-based firms). This has lead industry officials and regulators in foreign jurisdictions to complain that, because the U.S. rules reach outside U.S. borders, foreign banks could be subject to overlapping sets of rules and potentially result in constricted liquidity in the global market.
One bank has indicated that they are now trading swaps with units of U.S. financial institutions outside the U.S. under a U.S. Commodity Futures Trading Commission (CFTC) registration waiver. As of October 12, the CFTC will allow foreign banks to avoid the registration requirement by trading with overseas branches of U.S.-based banks, as long as the U.S. banks themselves are going to register as swaps dealers with the regulator, and thereby bring the transaction under the CFTC’s oversight.
Shifting interbank swaps business outside the U.S. could reduce U.S. banks’ ability to trade with customers over time. And if the trend of moving away from U.S. banks continues, some transactions, previously overseen by the CFTC if they involved at least one U.S. counterparty, would then be beyond the reach of the U.S. regulator all together (as the only participants are non-U.S. banks).
Final rules, which could take effect as soon as next summer, are expected by year end or early in 2013. Meanwhile, the CFTC has proposed a roadmap for cross-border financial reform and has been working with other regulators on how to implement derivatives reform. Banks are working to ensure that the CFTC’s waiver for trading with foreign branches of U.S. firms is included. The U.S. Treasury Secretary (which has the final say on any exemption in the final rules), has supported an exemption but has not yet issued a final determination to that effect.