Derivatives Without Borders vs. Dodd-Frank

New York Times Dealbook


The Dodd-Frank financial regulatory law spans nearly 1,000 pages — but apparently not the United States border.

Members of the Commodity Futures Trading Commission, the agency responsible for implementing dozens of Dodd-Frank’s restrictions on derivatives trading, told lawmakers in Washington on Wednesday that the exact scope of the law was vague.

“This is an issue that has been the subject of much legal debate, but I think that we need to cut through that morass to provide some certainty to market participants who are concerned about what laws are going to apply to them,” Bart Chilton, a Democratic commissioner at the Commodity Futures Trading Commission, told the House Agriculture Committee’s panel on commodities and risk management.

His comments echo larger complaints made by banks and other financial firms, which argue that the Dodd-Frank rules could push derivatives business and profits overseas.

The Dodd-Frank Act says that new restrictions on proprietary trading and the derivatives business do not apply in foreign countries unless there’s a “direct and significant connection with activities” in the United States.

It remains unclear how regulators will interpret that provision as they draw up the borders of the sweeping new regulations.

“The commission has not given the public any formal guidance on what this section means in practice,” Jill E. Sommers, a Republican member of the commission, told the panel. “This has already created regulatory uncertainty for firms with global operations as they attempt to plan for the future.”

Ms. Sommers also warned that European and Asian regulators have yet to complete — or in some cases even propose — rules that resemble Dodd-Frank. The law requires many derivatives contracts to be traded on regulated exchanges and run through clearinghouses, which act as a backstop in case one party defaults.

Under an agreement at the Group of 20 summit meeting in 2009, regulators across the world agreed to require clearing and exchange trading for derivatives. While the Commodity Futures Trading Commission and the Securities and Exchange Commission plan to complete these rules later this year, international regulators plan to wait until the end of 2012.

The European Commission, the European Union’s executive body, has discussed proposals that largely mirror Dodd-Frank’s requirements, but the regulators may take until 2012 or later to complete the plan.

Ms. Sommers warned that the disparate time frames may hurt American businesses or encourage firms to skirt the Dodd-Frank by booking derivatives deals out of Frankfurt or London.

The lag time “may shift business overseas as the cost of doing business in the U.S. increases and creates other opportunities for regulatory arbitrage,” Ms. Sommers said.

She also warned that some Dodd-Frank provisions would not match up with rules written by foreign regulators. The European Union, for instance, might exempt pension funds from mandatory clearing, she said.

Mr. Chilton, however, played down any disagreements among regulators.

“Of course, there are differences on some provisions of our respective laws, but the level of overall harmonization is substantial,” he said, adding that the Commodity Futures Trading Commission keeps in close touch with foreign regulators.

The commission’s staff exchanges daily e-mail with European Commission regulators, and the two teams hold video conferences. Gary Gensler, the chairman of the commission, also traveled to Brussels twice in the last year or so to work on the derivatives proposals.

But, as DealBook reported in April, the commission could not afford to send Mr. Gensler overseas. Mr. Gensler, a Goldman Sachs alumnus, paid his own way.

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