Congressmen Jim Himes (CT-4) and Scott Garrett (NJ-5), Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, will introduce Monday bipartisan legislation that will ensure United States-based financial companies trade on a level playing field with their international counterparts. The bill clarifies certain financial regulations to ensure U.S. banks that participate in international business can conduct activities with foreign entities in the same manner as their non-U.S. competitors.
"As we work to strengthen the economy here at home, it's important that our rules recognize we are competing in a global marketplace," Himes said. "This legislation strikes a balance that will protect American financial security while helping to ensure that home-grown financial companies are able to compete on a level playing field with their international counterparts, which will help keep more business activity here in the U.S."
The Wall Street Reform & Consumer Protection Act (Dodd-Frank) established a regulatory regime that, for the first time, brings transparency to the previously opaque derivatives market. As the European Union and other nations develop comparable standards, however, financial institutions and their counterparties may seek regulatory arbitrage opportunities by moving their swap-trading business offshore, which would reduce U.S. competitiveness.
This legislation preserves a robust and well regulated swap-trading business by U.S. financial institutions while ensuring protections remain in place to prevent the dangerous, opaque derivatives trading that contributed to the 2008 financial crisis and could, if not properly regulated, again put the world economy at risk. It permits non-U.S. companies that are registered as swap dealers to follow the capital rules of their home jurisdiction, rather than that of the U.S., as long as the home jurisdiction has comparable requirements and the home jurisdiction is a Basel Signatory. The legislation also prevents the possible requirement that registered swap dealers must post separate margins for each government under which they are regulated.
"In this time of great economic turmoil, Washington can give the American people no greater gift than to restore certainty in the marketplace and put our job creators on a level playing field with the international community," said Garrett. "This common-sense, bipartisan bill does exactly that. By giving companies who execute swap transactions certainty to know when they are subject to U.S. or foreign regulations, this bill ensures that transactions are not driven overseas and that American companies are not disadvantaged."
The swaps market developed as a global market, with the focus of trading determined by the location of the counterparties and the underlying assets rather than regulatory requirements. As the United States works to coordinate international harmonization of derivatives regulation, American rules must acknowledge that the U.S. is at least 12 to 18 months ahead of similar regulatory efforts in Europe and Asia.
Under the current rule proposals, a registered swap dealer could be subject to all U.S. regulations for all of its swaps, including swaps with non-U.S. persons. Thus far, the CFTC and SEC's proposed rules have been drafted without limitation on their cross-border impact. The lack of clarity on the extraterritorial impact of the proposed rules makes it difficult for swaps participants to structure their global swaps business. This would mean that U.S. regulations would apply to all of the swaps activities of a registered swap dealer that is based outside of the United States, including swaps that are otherwise of an entirely non-U.S. nature. This could subject non-U.S. registered swap dealers to both U.S. requirements and their home country requirements.