Commodity Futures Trading Commission chief Gary Gensler has persuaded U.S. regulators to insert new language into the Volcker rule clarifying its impact on foreign banks, according to people briefed on the change.
The revision, which applies to the rule’s definition of trading “solely outside the United States,” is designed to make sure that foreign lenders like Deutsche Bank AG and Barclays Plc (BARC) don’t escape the regulation’s ban on proprietary trading, the people said. It may also help put the CFTC on firmer ground as it fights a Wall Street lawsuit over the agency’s reach into foreign swaps markets.
Gensler is “coming to the close of his tenure and this is an opportunity for him to try to make Volcker as restrictive as he’s tried to achieve in other rules,” said Donald N. Lamson, a former bank regulator who is now a partner at the Shearman & Sterling LLP law firm in Washington.
Five agencies are set next week to approve the ban, the last major piece of the Dodd-Frank Act that Congress passed in 2010 to revamp oversight of the banking industry after the credit crisis. While the rule is supposed to stop banks from speculating with their own capital, it impacts one of Wall Street’s largest business lines -- the buying and selling securities for clients -- and has provoked a fierce lobbying battle.
Foreign and U.S. banks have also tussled over the rule and how it applies overseas trading, with each seeking to lock in a competitive advantage in the regulation’s fine print.
Gensler has taken a tough stance on the reach of Dodd-Frank into overseas trading, arguing that the CFTC should have an expansive view into what is a global market. He often cites the case of JPMorgan Chase & Co. (JPM:US)’s so-called London Whale trader, whose derivatives deals cost the bank $6.2 billion in losses.
The CFTC chairman has also been concerned that the foreign provisions in the Volcker rule need to be tightened to prevent another London Whale-type situation, according to the people, who asked not to be identified because the revisions have not been made public. Gensler has sought to make sure that the final regulation won’t allow large foreign banks to set up deals in the U.S. and then evade the rules by booking them overseas, the people said.
The revised language Gensler has incorporated into the rule seeks to make that clear, explicitly saying that traders based in the U.S. who arrange, negotiate or execute a deal must comply with the rule, the people said.
The provision mirrors an advisory opinion that the CFTC issued last month in an effort to make sure banks are not evading Dodd-Frank derivatives regulations by handling all aspects of a trade in the U.S. and then booking it in London, for example.
Three of Wall Street’s biggest lobbying groups sued the CFTC over the policy on Dec. 4. One of their main contentions is that the agency violated the law by not following proper procedures including analyzing the costs and benefits and holding an official vote.
By getting the language into the Volcker rule -- and having it approved by votes at five different agencies -- Gensler is trying to send a message to Wall Street that such a policy has broad support and may be difficult to challenge legally, the people said.
Whether that strategy works will be decided in court. Lawyers say that the Volcker rule is different than the CFTC’s derivatives regulations.
“Even if it’s not irrelevant for the challenge to the CFTC’s cross-border guidance, I wouldn’t put too much weight on it either,” Joel S. Telpner, a partner at the Jones Day law firm in New York, said in a telephone interview.
Still, including Gensler’s revised language in the Volcker rule could help the CFTC if there is an analysis of the economic impact of the policy, he said. If the court overturns the CFTC’s policy, the agency could use such an analysis to support a new formal rule.
Steve Adamske, CFTC spokesman, declined to comment.
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