JPMorgan Chase & Co. (JPM:US), Goldman Sachs Group Inc. (GS:US) and other U.S. banks would be subject to Dodd-Frank Act swaps rules in their overseas offices under guidance that may be proposed by the Commodity Futures Trading Commission.
The proposal for so-called interpretive guidance, scheduled for a vote today at a CFTC meeting in Washington, has been criticized by U.S. bankers who say it could put them at a disadvantage to overseas competitors. The international reach of clearing and trading regulations gained urgency after JPMorgan disclosed at least $2 billion in losses on trades by the bank’s chief investment office in London.
“I think if we were to leave the London branches of the U.S. banks or even the guaranteed affiliates out, it would be, so to speak, another loophole and a retreat from reform, where risk would come crashing back to our taxpayers and our Federal Reserve,” CFTC Chairman Gary Gensler testified to the House Financial Services Committee lawmakers during a June 19 hearing on the JPMorgan loss.
Dodd-Frank, the financial-regulation overhaul enacted in 2010, was intended to reduce risk and increase transparency in the $648 trillion over-the counter swaps market after largely unregulated trades helped fuel the 2008 credit crisis. It required swaps to be guaranteed by central clearinghouses that stand between buyers and sellers, traded on public exchanges and reported to swap-data repositories.
“As Gensler points out: In all these big blowouts, you have a global dimension,” James Angel, a finance professor at Georgetown University’s business school in Washington, said in a phone interview yesterday. “You can’t really blame a regulator faced with this kind of mess wanting to have all the information readily available.”
JPMorgan, Goldman Sachs, Morgan Stanley (MS:US) and other U.S. banks have argued that applying Dodd-Frank to their overseas operations would hurt their ability to compete with foreign- based rivals that may face other requirements.
“If JPMorgan overseas operates under different rules than our foreign competitors, we can no longer provide the best products and services to our U.S. clients or our foreign clients,” JPMorgan’s Chief Executive Officer Jamie Dimon said at the financial-services panel hearing on the losses. “The rules at the transaction level about margin reporting, all those requirements may enable Deutsche Bank to make the better deal.”
U.S.-based banks may be allowed to comply with the rules on a timetable that’s similar to one facing their overseas rivals, two people with knowledge of the guidance said yesterday.
The timetable under consideration by the CFTC would drop earlier plans to give foreign-based banks more time to comply with some regulations than overseas operations of U.S. banks, the people said on condition of anonymity because the guidance hasn’t yet been proposed.
The compliance schedule was the subject of negotiations yesterday before the agency’s vote today. Steve Adamske, a CFTC spokesman, didn’t immediately respond to requests for comment outside of normal business hours.
The guidance, which has been the subject of internal debate and disagreement at the agency during the last month, would be open to public comment before it is completed. U.S. Representatives Scott Garrett, a New Jersey Republican, and Randy Neugebauer, a Texas Republican, sent Gensler a letter yesterday urging the CFTC to adopt a form rule that includes an analysis of the costs and benefits of the regulation instead of informal guidance.
“We respectfully request that you do not move forward with the non-binding ‘guidance’ and instead proceed through a formal rule-making process and conduct the appropriate cost-benefit analysis that the law requires,” the lawmakers wrote.
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