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U.S. spat looms with foreign regulators over swap rules

Commodity Futures Trading Commission Chair Gary Gensler testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on Capito
Commodity Futures Trading Commission Chair Gary Gensler testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on Capito

WASHINGTON (Reuters) - The United States is on a collision course with regulators abroad as it plans to force foreign banks to comply with a host of new rules for risky derivatives, two sources close to the European Union said on Friday.

The U.S. swaps regulator has temporarily lifted many of the rules it drew up after the credit crisis, but they kick back into force on Saturday, and there is little sign the agency will allow much more leeway.

With only one more day to go, the Commodity Futures Trading Commission must also hammer out Memoranda of Understanding, documents that say how it cooperates with foreign regulators, one of the sources said.

"It doesn't make sense," the source said. "We're not making any progress."

The sources said the issue was with all six jurisdictions that deal with the CFTC, not just Europe. Other financial centers have in the past also been critical of the agency's strict view on rules abroad.

Politicians across the world agreed to clamp down on Wall Street after the 2007-09 credit meltdown, but different countries have since worked on rules that are not always identical and that have different time frames.

The CFTC has been comparing the rules and will recognize some of them through a legal concept known as substituted compliance. But this does not go far enough for the foreign regulators.

The CFTC had been looking at how much it could rely on foreign rules, but mainly focused on a subset known as entity-level requirements, Chairman Gary Gensler said in an interview.

These requirements are for risk management, capital adequacy and chief compliance officers, but not for a host of others that have to do with trading.

The agency's strict stance may mean that foreign banks have to comply with U.S. standards as well as those in their own country when dealing with American clients, or even when they serve European clients from New York.

The agency in the past year has often issued amendments or temporary exemptions to its rules days or even hours before it needs to make a decision, but it is unclear if and when it is planning to do so on this occasion.

Wall Street groups sued the CFTC this month, hoping to beat back cross-border guidelines that they fear may hurt markets and cut profits.

The CFTC did not respond to a request for comment.

PATH FORWARD?

The lucrative swaps market, which was long unregulated, has $630 trillion worth of contracts outstanding and is dominated by Wall Street banks such as Citigroup Inc, Bank of America Corp and JPMorgan Chase & Co.

The spat over how to regulate the market looms despite the "Path Forward" deal struck between the European Union and the CFTC in July, when the two sides said they were confident they could hammer out an understanding.

But in recent negotiations, "the (U.S.) colleagues were saying: 'Yes that's what we wrote, but it is a complex matter and you've misinterpreted it," the source said.

The main three issues where the rules apply are data reporting, routing of trades through clearing houses to reduce counterparty risk, and trading of swaps on platforms that are comparable with exchanges.

The CFTC is generally unwilling to budge on these rules, which mainly fall under the category of transaction-level requirements, but is more willing to grant substituted compliance for the entity-level requirements.

"We've asked the CFTC to apply (substituted compliance) to many more transaction- and entity-level requirements," the source said. He said the CFTC would allow some foreign rules on the entity level, but not for transactions.

This matches what Gensler said in the interview this week, when he addressed how the agency had gone about substituted compliance with Europe, Australia, Canada, Hong Kong, Japan and Switzerland.

"The bulk of what we've been looking at these last several months is with regard to the entity-level requirements in these six jurisdictions," he told Reuters.

He also said the process was a work in progress and that further determinations could be made later.

(Reporting by Douwe Miedema; Editing by Lisa Von Ahn)

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