CFTC coming under pressure to finalize derivatives regulation

Here is an update on the implementation of the Dodd-Frank derivatives regulation (part of the financial reform and consumer protection law) from JPMorgan (see attached document). For active derivatives end-users the clearing requirement deadline seems to be the end of this year. A good number of them are not even close to being ready and the implementation deadline will likely slip once again.

Source: JPMorgan

Of course this is only for products that can be cleared. What happens to derivatives that are not expected to be cleared, at least initially? The CFTC of course is going to impose certain high margin requirements on those (these margins can't be lower than those applied to cleared products.)

But the "non-cleared" margins can't be applied just to US banks because if margins for non-US swaps dealers are lower, US banks will not be able to compete. It means that these margin requirements have to be fairly uniform across jurisdictions, with other regulators playing in the same sandbox. And that's (one of the many areas) where the CFTC is running into difficulties.

IFR: - ... foreign regulators and banks have joined the chorus of disapproval, focusing on the potentially damaging effect margin requirements for uncleared swaps could have.

The most important response to watch for will not be from any individual country’s banking supervisor or US industry group, but from the European Commission’s lead regulator on Internal Market and Services, Michel Barnier.

“We are particularly concerned with potential CFTC margin requirements for swaps that are not cleared through a central counterparty,” Patrick Raaflaub and Mark Branson, the CEO and head of banking regulation at the Swiss Financial Market Supervisory Authority, wrote in a letter to the CFTC in early July. “If such margin requirements are applied to a Swiss-based entity, this may duplicate the requirements and may possibly conflict with international and domestic capital adequacy rules, thereby producing inefficiencies.”

“Due to [this] concern, we cannot exclude that FINMA may have to deny financial institutions permission to supply certain information or grant direct access to U.S. supervisors,” they warned.

That statement could be perceived as a shot across the CFTC’s bows in what could become a power-struggle between international regulators, said a regulatory lawyer in New York. FINMA is implying that it would deny Swiss banks the right or ability to comply with certain US regulations, even if Gensler mandated it. The effect of such a move by FINMA could mean a regulatory stalemate for Swiss banks looking to engage in swaps with US persons or their affiliates after Dodd-Frank is fully implemented in the US, the lawyer said.

This is not a surprise given that the CFTC has trouble regulating futures brokers in the US - which has been its main job. Now they are trying to dictate global regulation on something the agency has little experience with. Even in the US people are beginning to ask questions.

IFR: - The US Chamber of Commerce submitted a letter this month warning Gensler that foreign regulators may feel the impulse to extend the scope of their derivatives regulations back into the US due to the “extraterritorial application of derivatives regulation”. David Hirschmann, the author of the letter, added that an “overly broad” application could put foreign branches of US firms at a competitive disadvantage – criticism US banks have repeatedly raised.

This process has been fraught with problems from the beginning. Zealous, politically motivated, and an inexperienced group has been at this for years, introducing tremendous uncertainties into the implementation process and incremental risks into the derivatives market as a whole.

Enjoy! J.P. Morgan Regulatory Update Slides July 2012

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