US, EU reach eleventh-hour deal on derivatives


“With these joint understandings, together, we’ve taken another significant step in our mutual journey to bring transparency and lower risk to the swaps market worldwide,” CFTC Chairman Gary Gensler said in a statement.

The agreement was announced just one day before the deadline on Friday. Financial analysts worried that a late announcement could disrupt the global market.

“It would’ve been nice to get it sooner,” said Patrick Sims, a director at the consulting firm Hamilton Place Strategies.

“It’s kind of sad that it has to go up against the deadline because you do risk the disruption in the market,” Sims added.

In a statement, CFTC Commissioner Bart Chilton praised the agreement.

“Many had doubts about achieving greater global financial regulatory harmonization, but this demonstrates heavy duty headway is being made,” he said. “Both sides recognize the global reach of markets today and the need for harmonization among rulemaking regimes to the extent possible.”

Foreign branches of American firms are not currently subject to the same rules as their domestic counterparts.

Under the new guidance, however, those companies’ derivatives deals that occur in the 28 European Union countries will be subject to oversight by European regulators instead of Americans. That scheme of “substituted compliance” is expected to smooth out inconsistencies between the continents and be more efficient.

“Jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes,” the CFTC said in announcing the agreement.

Most international derivatives deals, which involve bets on the value of other assets or bonds, are conducted between the U.S. and European Union.

Last summer, the CFTC proposed expanding its oversight of the international derivatives market, known as cross-border swaps.

The enhanced regulation was conceived in accordance with the 2010 Dodd-Frank financial reform law to crack down on behavior that was blamed for contributing to the 2008 financial crisis.

Before the Dodd-Frank bill, the derivatives market was largely unregulated.

Congress, in recent weeks, has attempted to weigh in on the agency’s rulemaking.

In June, the House passed a bill to tie the CFTC’s actions to the Securities and Exchange Commission, which is also working on a rule for international swaps. That bill also sought to rein in the number and types of deals that would be covered by the CFTC action. 

In May, a group of Senate Democrats sent a letter to the CFTC chairman asking him to issue strong rules. 

In addition to the deal with European regulators, the CFTC invited other countries to join the approach to broaden global oversight of the swaps market.

“This is a trend that should continue,” Sims said. “Markets are global, and as we have seen through the financial crisis, we need to be working together on harmonization.”

-- This story was updated with additional information at 5:22 p.m.