Wall Street Trade Groups Challenge Overseas Swaps Rules

Banking trade groups, fearful of a U.S. push to scrutinize the overseas trading activities of large international banks, filed a lawsuit on Wednesday that challenges new guidelines put in place recently by the Commodities Futures Trading Commission.

The move was a response to a controversial initiative by the agency to increase oversight of derivatives trading in markets like London and Hong Kong, long one of the most profitable if not risky business areas for multinational banks like JPMorgan Chase, Barclays and Deutsche Bank.

And it underscores increasing worries by large banks in general that the raft of rules and regulations that have come in response to the recent spate of scandals and crises â€" from higher cash cushions to hiving off bank trading arms â€" will cause unneeded harm not just to the banks themselves but the broader financial climate as well.
“None of this is going to catch the next London Whale or A.I.G.,” said Stephen O’Connor, the chairman of the International Swaps and Derivatives Association, one of the three groups that brought the suit. “What we really need is a common international approach to these rules.”

At its heart, the challenge reflects a broad worry among industry activists and conservative lawmakers in Washington that the trading commission, under its aggressive and outgoing chairman Gary Gensler, has gone too far.

And that while these new rules may well be applauded by those who contend that global banks need to be reined in, the ultimate effect will be reduced trading volumes in overseas markets with the cost being borne by pension funds and multinational corporations.

“The international financial community is very upset about this and so am I,” said Judd Gregg, a former Republican Senator who heads the Securities Industry and Financial Markets Association, another party to the suit. “What you have is a chairman of a commission acting unilaterally â€" the precedent is staggering and no other agency is doing this.”

Mr. Gensler and the trading commission, however, have said that in order to effectively police the $7 trillion plus market for derivatives â€" with much of this business being transacted at a far remove from American regulators â€" banks that have a presence in the United States but do their high risk trading in London need to meet a higher standard.

Regulators point to a series of international financial scandals, such as the interest rate fixing scheme as well as the current investigation into foreign exchange trading, that supports the need for curbs on complex derivatives trading that span different continents and involve many billions of dollars.

The new rules are set to come into effect early next year. And while the banks and their lobbyists warn of dire consequences as clients move their derivatives trades from the likes of Citigroup to smaller banks in Europe that do not have a U.S. footprint, they have not furnished actual estimates in terms how much global trading volumes will suffer.

It remains unclear as well as to how the United States District Court in Washington will respond to the legal sally.

Some challenges to Dodd-Frank rulings have been successful while others have not.