In Fight Over Bank Rules, Regulator Calls for Compromise

As federal regulators stumble toward a deadline to rein in risky trading overseas, one official has introduced plans that he hopes will salvage the overhaul.

On Thursday, Bart Chilton, a Democratic member of the Commodity Futures Trading Commission, called on his agency to strike a compromise over the so-called cross-border plan. While Mr. Chilton signaled a willingness to phase in certain regulations over time, he argued that the agency should finalize its plan ahead of a mid-July deadline.

“We can complete our work on cross-border issues now and provide certainty to markets now,” Mr. Chilton will say in a speech on Thursday, according to a copy of his prepared remarks.

If completed by the deadline, the guidance would clarify the breadth of new trading rules adopted in the wake of the financial crisis, when overseas risk-taking imperiled some of the largest financial firms in the United States. In particular, the guidance would outline how the rules apply to foreign banks and overseas affiliates of banks based in the United States, taking aim at those that ship trading overseas to escape scrutiny from American regulators.

The issue â€" arguably the most contentious aspect of a federal crackdown on the $700 trillion marketplace for financial instruments known as derivatives - has set off a Wall Street lobbying frenzy and divided the trading commission’s five-member panel.

With only a month to go before the agency’s self-imposed deadline, the commissioners find themselves at odds on crucial aspects of the plan, including how much to defer to European regulators, who have yet to finalize their own overhaul of derivatives trading. And in recent days, an even thornier question arose: should the commissioners delay the plan until 2014 to allow the Europeans time to catch up?

Mr. Chilton, seen as the most liberal of the agency’s commissioners, is advocating something of a middle ground.

In a speech before the Institute of International Bankers at the Yale Club in New York, he is expected to propose that the agency complete a strict version of the guidance before the July 13 deadline. But in a compromise, he will also suggest that the agency grant foreign affiliates of United States banks extra time to comply with certain derivatives rules.

“We need to make sure the right institutions are subject to appropriate regulation and oversight with recent history as a guide,” Mr. Chilton will say on Thursday. “At the same time, we should simultaneously implement targeted, staggered cross-border compliance.”

Under Mr. Chilton’s plan, the agency would allow the overseas affiliates a brief reprieve before complying with certain derivatives rules created under the Dodd-Frank Act, even though the banks have had three years to prepare for the law since it was passed after the financial crisis. The law, among other things, requires banks to register with regulators, push their derivatives trades onto regulated trading platforms and turn over a battery of information about their trades.

Mr. Chilton, who also appeared on CNBC to promote the plan, called it an “appropriately nuanced, time-limited solution,” an approach that could satisfy critics of the cross-border guidance without alienating proponents of derivatives reform.

Yet the fate of his plan is unclear. While it could be one of the few viable options left with the mid-July deadline looming, the internal wrangling at the trading commission could jeopardize any last-ditch deal-making.

Mr. Chilton and Gary Gensler, the Democratic chairman of the trading commission, are at odds with two Republican commissioners and even one Democrat, Mark Wetjen, who have raised concerns about the guidance.

The Republicans, who would like to put off writing the guidance until the end of the year, argue that it could produce conflicts with foreign regulators and drive trading business away from Wall Street banks to overseas competitors. An extended deadline, they argue, will allow foreign regulators time to draft derivatives rules of their own.

Their approach echoes concerns raised by some of the world’s top finance ministers, who are concerned that American authorities are overstepping their borders.

But Mr. Gensler, whose term ends at the end of the year, has cautioned against a deadline extension. Mr. Chilton on Thursday will also come out against such a move, arguing that the stability of the global financial system is at stake.

Just five years ago, foreign derivatives trading by the American International Group in London nearly brought American firms to their knees. JPMorgan Chase’s recent $6 billion trading loss, which took place at a London-based unit, further highlighted that risk-taking overseas can come crashing back to American shores.

While Mr. Gensler and Mr. Chilton are outnumbered, the agency is unable to extend the deadline unless the chairman approves.

“I appreciate and understand this approach, although it doesn’t do what Dodd-Frank requires us to do,” Mr. Chilton will say on Thursday.

The debate stems from the fine print of Dodd-Frank. Under the 2010 law, the trading commission is supposed to apply swaps reforms outside the United States only if those activities have “a direct and significant connection with activities in, or effect on, commerce of the United States.”

Overseas trades that involve American companies, or a foreign company that is guaranteed by an American bank, would most likely be covered. It is unclear, however, how much the trading commission will offer so-called substituted compliance, in which the trading commission will defer to foreign regulators so long as they have rules that generally compare to Dodd-Frank.

As the trading commission grapples with the nuance of the law, it has been inundated with complaints from banking lobbyists. Lawmakers, too, have taken aim at the agency. The House passed a bill on Wednesday that would curtail the agency’s ability to apply Dodd-Frank rules overseas, which could encourage the trading commission to delay its guidance.

But Mr. Chilton says the agency has had enough time to finish its work.

“This can be done,” he will say in the speech. “It needs to be done.”