CFTC chairman calls for Dodd-Frank to go beyond U.S. shores, saying: 'We've seen this movie before'
First Published 7th June 2012
The chairman of the U.S. regulator said Dodd-Frank should cover overseas operations tied to U.S. entities or else risk a repeat viewing of the kind of disaster film where the script was all too familiar.
New York - The chairman of the Commodities Futures Trading Commission (CFTC) made clear he does not want the Dodd-Frank law to stop at U.S. borders, saying swaps reform should cover transactions with overseas branches that are guaranteed by U.S. entities or operating as conduits for U.S. entities.
Chairman Gary Gensler said in a speech that regulators had to pay heed to what had happened repeatedly when U.S. financial organisations used overseas operations to conduct their business.
"Recent events at JPMorgan Chase are a stark reminder of how swaps traded overseas can quickly reverberate with losses coming back into the United States," Gensler said.
"We've seen this movie before. Financial institutions set up hundreds, if not thousands of legal entities around the globe. During a default or crisis, risk inevitably comes crashing back onto our shores."
The chairman rattled off a list of firms whose overseas operations caused massive problems.
"AIG's subsidiary, AIG Financial Products, brought down the company and nearly toppled the U.S. economy. How was it organized? It was run out of London as a branch of a French-registered bank, though technically was organized in the US.," Gensler said. He cited cases with Lehman Brothers, Citibank, Long-Term Capital Management and Bear Stearns where an office outside of the United States was the epicentre of a calamity.
Gensler said many in the industry wanted these experiences to be ignored.
"They might tell you that swap trades booked in London branches shouldn't be brought under Dodd-Frank reform. They might tell you that their affiliates guaranteed by their mother ship shouldn't come under Dodd-Frank reform. They might tell you that their affiliates acting as conduits for swaps activity back here shouldn't be brought under Dodd-Frank reform."
That course would result in moving risk offshore but it would still reside within U.S. institutions and in times of crisis could come back to American shores.
"I believe that swaps market reform should cover transactions not only with persons or entities operating in the U.S., but also with their overseas branches. In the midst of a default or a crisis, there is no satisfactory way to really separate the risk of a bank and its branches," Gensler said.
"Likewise, I believe this must include transactions with overseas affiliates that are guaranteed by a U.S. entity, as well as the overseas affiliates operating as conduits for a U.S. entity's swaps activity."
FEWER THAN 20 TO GO
Gensler said the CFTC had completed 33 reforms and had fewer than 20 to go. "Nearly four years after the crisis and two years after Dodd-Frank became law, it's critical that we finish these reforms to protect the public and promote healthier markets."
The chairman said the CFTC was hoping to complete rules for the block rule and swap execution facilities (SEFs) later this summer.
He said the CFTC had made significant progress on clearing and staff were preparing recommendations for the Commission and for public comment on clearing requirement determinations, with the first of these set to be put out for public comment in the summer and possibly completed in the autumn. Staff are also recommending a requirement for fixed-to-floating interest rate swaps, basis swaps, forward rate agreements, and overnight index swaps in four currencies: U.S. dollars, Euros, British pounds and Japanese yen.
For CDS indices, the requirement likely will cover certain North American investment grade and high yield CDX indices, as well as certain European iTraxx, high volatility, and crossover iTraxx indices, Gensler said.
The CFTC will soon consider a final rule on the implementation phasing of the clearing requirement, he added.
The Commission has completed dealer registration rules, as well as a joint rule with the Securities and Exchange Commission further defining the terms "swap dealer" and "securities-based swap dealer." Dealers will be required to register and Gensler said a staff document on this definition rule would be considered quickly.