The commodity futures regulator’s plan to oversee swaps made by foreign firms with U.S. participants departs from international standards and needs to be re-thought, he said.
The regulator’s guidance on the cross-border application of its swap dealership rules “breaks from standards of international comity by giving US regulators unprecedented regulatory scope over activities taking place in Europe, Asia and other jurisdictions,” he said.
His comments came immediately after CFTC chairman Gary Gensler addressed SIFMA’s audience of securities industry professionals, gathered at the Marriott Marquis Hotel near Times Square.
“Fine-tuning is expected,’’ Gensler said. “We welcome inquiries from market participants. My fellow commissioners and I, along with the CFTC staff, are all committed to sorting through issues as they arise.’’
Ryan said there has been an “unprecedented outcry’’ from G20 finance ministers and regulators about some the extraterritorial impact of Dodd-Frank Wall Street Reform Act rule-making, including not just this derivative reform but also the Volcker Rule, which would preclude banks from trading with their own shareholders’ capital.
But the oversight of foreign firms and the thresholds on which should have to register with the CFTC need to be reworked, he said, as Asia and Europe move in different directions on the same question.
“It’s time to step back, review what we are trying to accomplish, and find a better
approach to getting it done,’’ he said. “We cannot afford conflicting and overlapping rules proposals which produce extended uncertainty for everyone in the economy.’’
But cross-border application of swaps market reforms are not going away, Gensler said.
“During a default or crisis, risk knows no geographic border,’’ he said. “If a run starts on one part of a modern financial institution, almost regardless of where it is around the globe, it invariably means a funding and liquidity crisis rapidly spreads’’ globally.
This was true, he said, during the credit crisis of 2007, 2008 and 2009 when swaps problems quickly spread to the overseas affiliates and operations of AIG, Lehman Brothers, Citigroup and Bear Stearns.
“AIG Financial Products’ swaps business was basically run out of Mayfair in London,’’ Gensler said. “It nearly brought down our economy.’’
The same was the case a decade earlier with the collapse of hedge fund Long-Term Capital Management. “You may think of it as having been run out of Connecticut, but its swaps were booked in its Cayman Islands affiliate,’’ he said.
And this year, JPMorgan Chase’s multi-billion dollar trade loss on credit-default swap index products emerged out of the U.S. bank’s Chief Investment Office in London.