On June 29, the CFTC released its proposed interpretive guidance on cross-border implementation-of financial reforms – essentially, how exactly, if at all, will new CFTC regulations flowing from Dodd-Frank be applied to foreign subsidiaries of U.S. banks and others trading on U.S. markets from another country. Organizations working for strong financial reforms were encouraged to see the CFTC, in the face of objections from Wall Street and abroad, adopt strong interpretive guidelines that would affect a significant portion of traders on U.S. markets.
The response from Wall Street traders left no question that this will be an important battleground for the effective implementation of the regulations called for in Dodd-Frank. Wall Street has relentlessly attempted to undercut strong regulations at every point in the implementation process, and the cross-border application question is no exception. Because derivative markets are global– nearly 70 percent of Wall Street banks’ derivative transactions are already routed through foreign subsidiaries–weak cross-border application of new regulations on transactions involving US subsidiaries could significantly undermine the intention of the Dodd-Frank Act. Without strong cross-border considerations, Wall Street will be able to elude regulations through the shiftiness of regulatory arbitrage – shifting trades to where regulations are the weakest.
Days before the CFTC release, Michael Barnier, the EU commissioner overseeing financial services, warned in a Financial Times op-ed that “The biggest danger to success is that of excessive attempts by regulators to exercise authority beyond their normal boundaries.” Barnier was concerned that U.S. regulators were seriously considering a wide interpretation of who a “US person” is under the Dodd-Frank Act. The danger, in Barnier’s opinion, is that many of the requirements would apply to companies in the EU and to trades between the EU and US clients.
“A narrow definition of what a “US person” is under the Dodd-Frank Act is the first place to start. If not, it will be difficult for the EU to accept US rules as equivalent to ours,” he went on.
This is the same reasoning that Republican commissioners at the CFTC used in their comments to voice disagreement with the interpretive guidelines. While all five commissioners voted in favor of the interpretive guidelines, Republican’s Scott O’Malia and Jill Sommers approved them only to move the process forward, and disagreed with what they see as an “overreach” of US regulatory purview. O’Malia even cited Barnier’s FT comments.
The desperate appeal to standards of international comity in financial regulations would be honorable if it weren’t meant to hide a more dubious intention of weakening cross-border implementation: To give Wall Street a way to avoid the teeth of Dodd-Frank by way of regulatory arbitrage. After all, EU regulations, as currently proposed, are not as strong as those passed in the US.
While we understand that cross-border implementation is a complex task requiring a nuanced approach, we believe the “biggest danger to success” is that of cross-border implementation so weak that it undermines the effectiveness and intention of the regulations as a whole: To protect the integrity of the US economy, and tax-payers from paying for another bailout. The currently proposed interpretive guidelines do take seriously both strong cross-border implementation and international comity, leaving a major role for other countries’ regulations to combine with those of the U.S.
You can find the proposed interpretive guidelines and each CFTC commissioner’s comment here.