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Cross-Border Exemptions Slammed as 'Backdoor Repeal' of Derivatives Reforms

Joe Mont | December 20, 2012

Equating cross-border exemptions to a last-minute, “backdoor repeal” of derivatives reforms demanded by the Dodd-Frank Act, members of the advocacy group Americans for Financial Reform are urging regulators to focus on domestic protections ahead of international concerns and big bank lobbying efforts.

During a press conference held Wednesday by the coalition of nearly 250 national and state organizations, several of its members said rules intended to bring transparency and safety to previously unregulated derivatives markets are threatened by delays in applying the Commodity Futures Trading Commission's new rules to international swaps activity. Exemptions for transactions conducted through overseas subsidiaries would undermine the intent of the Dodd-Frank Act's reforms, they said.

What may appear to be a backroom argument about “boring technical details” is really an effort “to snatch defeat from the jaws of victory” and unravel the whole structure of Dodd-Frank derivatives oversight, said Marcus Stanley, policy director of Americans for Financial Reform. Even temporary exemptions could “get cemented in place and eventually be made permanent,” he cautioned.

Michael Greenberger, professor at the University of Maryland's Francis King Carey School of Law and former director of trading and markets for the Commodity Futures Trading Commission, said overseas exemptions would create a  loophole “that could sink the entire regulatory structure” for over-the-counter derivatives and swaps. Financial institutions can “by the stroke of a computer key conduct and execute swaps transactions outside the sovereign United States,” he said.

Large U.S. financial institutions already conduct more than half of their derivatives business through foreign subsidiaries, Greenberger said, explaining the reason that Section 722 of the Dodd-Frank Act established that any swaps activity with a “direct and significant connection with activities in, or effect on, commerce in the U.S.” would be covered by new requirements. If foreign subsidiaries of U.S. banks fail, “those banks will be lining up again and making the argument that ‘if you don't rescue us, the world economy will collapse.'”

“Foreign jurisdictions will get the business and we'll get the risk,” said Wallace Turbeville, senior fellow at Demos and former vice president of Goldman Sachs.

Inferior regulation would be the inevitable result, said Dennis Kelleher, president of Better Markets, an organization that promotes financial reform. Overseas enforcement “has been abysmally bad,” he said, suggesting that U.K. regulators knew about the rigging of the LIBOR rate for years, yet “did nothing.”

Big banks make a “strange argument,” Stanley said. “If it's really true that there's a competitive disadvantage,' what that's saying is that other countries have laxer regulation of their derivatives markets.”