A Trading Tactic Is Foiled, and Banks Cry Foul

What country are you in? Where is your business located? In what country did your trade take place?

Gary Gensler, chairman of the Commodity Futures Trading Commission, clarified some reporting rules, dismaying banks.

Those were once questions whose answers were so obvious that no one asked them. Now they are questions that can drive financial regulators and tax collectors to distraction. Lawyers can get rich proving that under one definition or another, the person, company or transaction was somewhere with more convenient rules.

Earlier this year, we learned about Apple’s disappearing subsidiary, an extremely profitable one that had no employees and â€" for tax purposes â€" was located nowhere. Under United States tax law, it was based in Ireland. Under Irish law, it was based in the United States. So it paid taxes to no one. Presumably, if Congress ever overhauls the tax code, that will be dealt with.

Now we learn of the vanishing swaps market.

During the deregulation era â€" broadly from about 1980 through 2008 â€" swaps were more or less unregulated and grew exponentially. After the financial crisis, Congress regulated swaps for the first time in 2010, under the Dodd-Frank financial overhaul law, which many banks fought. A market that had operated under cover â€" and that played a significant role in causing the financial crisis â€" would be brought into the open. Trades would be reported for everyone to see. They would go through clearinghouses. Participants would put up margin and have to put up more if the value of their position declined.

And some overseas trading would be covered. Congress was quite aware that the American International Group had hidden huge bets in the credit-default swap market in an unregulated British subsidiary â€" and that those bets had almost brought down the company.

The new American rules have started to take effect, and it turns out that some of the banks found a way around the guidance issued in July by the Commodity Futures Trading Commission, which regulates most of the American swaps market. Somehow, a lot of swaps that were actually being traded in New York were not being reported as American trades. That had a big advantage from the point of view of the banks doing the trading: less transparency and no requirements for customer margin.

At first, that offended other banks, who deemed it unfair that they had to play by the rules while others did not. Then those banks began to set up their own foreign affiliates to keep the trades away from United States rules.

To Gary Gensler, the commission’s chairman, it was obvious that the commission’s intent had been misunderstood or simply distorted. He had the commission’s staff issue an “advisory” on Nov. 14, saying that if a swap trader was doing business in New York, he or she was actually in the United States.

“If a foreign-based swap dealer has personnel in New York and they regularly arrange, negotiate or execute swaps in the United States, then the transactions come under Dodd-Frank requirements,” Mr. Gensler said in a speech to a swaps conference on Monday. “As the advisory stated, these activities are ‘core, front-office activities’ of a swap dealer’s dealing business.

“In other words, a U.S. swap dealer on the 32nd floor of a New York building and a foreign-based swap dealer on the 31st floor of the same building have to follow the same rules when arranging, negotiating or executing a swap. One elevator bank, one set of rules.”

If Mr. Gensler really thought that was routine, he was quickly disabused of the idea. The banks, which had thought the commission understood and accepted their tactic, were outraged. They complained to politicians and found immediate support.

First out of the box was Jeb Hensarling, the Texas Republican who is chairman of the House Financial Services Committee. To him, this was not an issue of how to interpret or fix some poorly written guidance, let alone a squabble over a transparent effort to avoid the Dodd-Frank law. It was a total outrage, one that threatened the United States economy and was likely to force grandmothers to pay more to fly.

“At a time millions of Americans still can’t find a job, this surprise decision made late Thursday afternoon by unelected and unaccountable bureaucrats at the C.F.T.C. will do nothing but inject more uncertainty into our weak economy,” he said. “The C.F.T.C. staff â€" not the commissioners, but the staff â€" decided late Thursday afternoon that swaps transactions that had been permissible Thursday afternoon would not be permissible on Friday morning.”

Floyd Norris comments on finance and the economy at nytimes.com/economix.

A version of this article appears in print on November 22, 2013, on page B1 of the New York edition with the headline: A Trading Tactic Is Foiled, And Banks Cry Foul.