WASHINGTON DC—Today, a bipartisan group of New York lawmakers warned federal regulators against implementing a new rule on derivatives that would put U.S. financial firms at a competitive disadvantage.
At issue are new regulations that would apply margin requirements to derivative transactions between non-U.S. subsidiaries of U.S. entities and non-U.S. counterparties. By contrast, the proposed rules would not apply to non-U.S. banks doing business with non-U.S. clients. This disparity in treatment creates a severe disincentive for non-U.S. companies to do business with overseas affiliates or subsidiaries of U.S. financial institutions.
“We are concerned that these proposals will inevitably result in significant competitive disadvantages for U.S. firms operating globally. Moreover, the proposals are inconsistent with Congressional intent regarding the territorial scope of the new regulatory framework for derivatives,” the lawmakers wrote.
The letter was signed by U.S. Senators Charles E. Schumer and Kirsten Gillibrand and Representatives Carolyn Maloney, Gregory Meeks, Joseph Crowley, Carolyn McCarthy, Gary Ackerman, Steve Israel, Anthony Weiner, Peter King, Michael Grimm, Nan Hayworth, Chris Gibson, Richard Hanna, Tom Reed, Ed Towns, Eliot Engel and Yvette D. Clarke
The New York lawmakers said that “extraterritorial” trades involving parties located outside the United States were not intended to be subject to the new regulatory system for derivatives established under last year’s financial reform law. Until international derivatives rules can be harmonized, the lawmakers said, the United States should not subject these foreign-based trades to a different standard than other countries’ regulatory regimes. To do so would only hurt the country’s competitiveness in the financial services industry. Foreign regulators have also raised concerns about the proposal, which would encroach on their turf.
The lawmakers asked regulators to better coordinate new margin requirements with international regulators to ensure that they adopt as rigorous a regulatory regime for the over-the-counter swaps markets in their countries as the U.S. will have. Ideally, the lawmakers said, those rules would perfectly mirror the U.S. rules, minimizing the opportunity for regulatory arbitrage by non-U.S. customers of U.S. entities.
The text of the lawmakers’ letter—which was sent to Federal Reserve Chairman Ben Bernanke, Commodity Futures Trading Commission Chairman Gary Gensler, Federal Deposit Insurance Corporation Chairman Sheila Bair and Acting Comptroller of the Currency John Walsh—can be seen below:
May 17, 2011
|
The Honorable Ben Bernanke |
The Honorable Gary Gensler |
|
Chairman |
Chairman |
|
Board of Governors of the Federal Reserve System |
Commodity Futures Trading Commission |
|
20th Street and Constitution Avenue, NW Washington, DC 20551 |
Three Lafayette Centre 1155 21st Street, NW |
|
|
Washington, DC 20581 |
|
|
|
|
The Honorable Sheila Bair |
Mr. John Walsh |
|
Chairman |
Acting Comptroller |
|
Federal Deposit Insurance Corporation |
Office of the Comptroller of the Currency |
|
550 17th St, NW |
250 E Street, SW |
|
Washington, DC 20429 |
Washington, DC 20219 |
Dear Chairman Bair, Chairman Bernanke, Chairman Gensler, and Acting Comptroller Walsh,
We are writing with respect to your proposed regulations applying margin requirements under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) to derivatives between non-U.S. subsidiaries of U.S. entities and non-U.S. counterparties. We are concerned that these proposals will inevitably result in significant competitive disadvantages for U.S. firms operating globally. Moreover, the proposals are inconsistent with Congressional intent regarding the territorial scope of the new regulatory framework for derivatives.
As you know, rewriting the regulatory framework for derivatives trading in the U.S. is an important step in making our financial system more resilient and more transparent. But absent harmonization between new rules here and abroad, disparate treatment of U.S. firms will only encourage participants in the derivatives markets to do business with non-U.S. firms. Accordingly, it is important to strike a balance between implementing the new safeguards and harming the competitiveness of U.S. financial institutions vis-à-vis their international counterparts.
Congress was cognizant of the need to strike this balance, and included provisions in Dodd-Frank that explicitly instruct regulators to guard against evasion of the law as well to impose the regulations extraterritorially beyond the U.S. only if there is a “direct and significant connection” with U.S. activities or commerce. These provisions are intended to protect both the safety of the financial system, by preventing regulatory arbitrage for the purpose of evading the law, and the competitiveness of U.S. institutions, which is necessary for a healthy U.S. banking system. We are concerned that your respective rule proposals would disrupt that balance and could have significant negative effects on the competitiveness of U.S. institutions. Under the proposals, margin requirements do not apply to non-U.S. banks doing business with non-US clients, but they do apply to non-U.S. subsidiaries and affiliates of U.S. institutions doing business with non-US clients outside the U.S. This disparity in treatment creates a severe disincentive for non-U.S. companies to do business with overseas affiliates or subsidiaries of U.S. financial institutions.
In light of these concerns, we ask that you reconsider the extraterritorial application of these requirements. The application of new margin requirements to activity taking place wholly outside the U.S. must be coordinated with international regulators. We urge you to work closely with your international counterparts to ensure that they adopt as rigorous a regulatory regime for the over-the-counter swaps markets in their countries as we will have in ours. Ideally, those rules would perfectly mirror the U.S. rules. This would minimize the opportunity for regulatory arbitrage by non-U.S. customers of U.S. entities.
We certainly cannot afford a “race to the bottom” in regulatory standards, but, absent a comparable margin regime in other jurisdictions, adopting these rules would accomplish little more than reducing the competitiveness of U.S. financial institutions vis-à-vis their international counterparts and causing them to lose business to foreign entities through regulatory arbitrage by their non-U.S. customers.
Thank you for your consideration.