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The CFTC's Regulation of Wall Street's High Risk Global Derivatives Bets Must Protect U.S. Taxpayers

This post has information on all aspects of the critically important issue referred to as "cross border" regulation, including an attached comprehensive summary Power Point on the latest meritless attempts to delay implementation as well as many other materials linked below. 

After two and a half years of extensive deliberations and considerations, the CFTC on July 12, 2013 approved the future partial regulation of cross-border derivatives transactions. Unfortunately, what are likely some very good, some not-so-good and some to-be-determined provisions means that Wall Street’s war on regulation of high risk cross-border derivatives dealing is far from over.

Although the details of the actions taken today remain unknown, this critically important regulation will not be implemented for months, if not years in certain aspects. And, the CFTC opened yet another 75 day comment period on the exemptive order and industry will no doubt flood the CFTC with yet dozens more comment letters and demands for meetings. This will result in the inevitable calls from industry for more delay and changes.​

This remains a massive fight over a critical issue at a critical time. Once again, CFTC regulators must decided whether they are going to protect Wall Street's profits over Main Street's pockets. On July 11, the CFTC announced that it had struck a deal with the European Union to work together on regulating cross-border derivatives, which cleared one hurdle. Most worrisome is what is referred to as ‘substituted compliance’ which allows banks to follow as-yet-unwritten foreign regulations.  If not done right by the CFTC in the future, ‘substituted compliance’ will be little more than outsourcing the protection of the American taxpayer to foreign regulators who have repeatedly failed to protect their own taxpayers, investors and depositors. 

Regulating "cross border" derivatives transactions is required by the Dodd-Frank financial reform and Wall Street re-regulation law.  "Cross border" refers to activities outside the US which nonetheless have a direct and substantial effect on and in the US. (which is detailed in the attached Power Point and the other materials below).  This relates in particular to high risk derivatives trading activities outside the US involving Wall Street's huge derivatives dealing megabanks where their overseas blow-ups come back to the US and require bailouts by US taxpayers. 

If the CFTC doesn't get this right and do the right thing, future financial crises are much more likely and future bailouts funded by US taxpayers are much more likely as well. This July 12 editorial from The New York Times Editorial Board expertly explains why strong cross border derivatives regulations are essential to avoiding future crises and bailouts.

This is exactly what happened in 2008-2009:  AIG was based in New York, but did its massive, high risk derivatives trading in London.  When AIG's London operations blew-up, the US taxpayers and government had to use $182 billion to bailout AIG in New York.  The same is true for Citigroup and many others:  they all did high risk trading and investments overseas, but the bill for blowing themselves up came back to the US for the US taxpayer to pay.  (While it didn't require a bailout, the recent multi-billion dollar "London Whale" loss by New York-based JPMorgan Chase's London derivatives operations illustrates how high risk overseas activities cost US banks big bucks;  if the losses from that bet were bigger and threatened the solvency of JPMorgan Chase, US taxpayers would have had to bail out JPMorgan for those betting losses.)

Risk knows no geographic boundary.  No matter where Wall Street's megabanks do their risky trading and investments, they will bring those failures back to the US for the US taxpayer to pay their bills.   As detailed in the attached Power Point, the sad truth is that Wall Street's global dealer banks are so big and so sprawling, it is only a matter of time before there are more disasters that require more U.S. bailouts.  They are structured & staffed by design for regulatory arbitrage & today’s virtual markets, where massive amounts of business can be shifted from one place in the globe to another with a mere keystroke, make that easy and inevitable. That's why strong and effective cross-border regulation must be put in place without delay. 

People must remember that the US taxpayers and government bailed out the global financial system in 2008-2009.  No other country did.  Yes, some bailed out their own banks, but only the US bailed out the world: 17 of AIG's 22 counterparties were foreign banks and 9 of the 20 largest users of the Federal Reserve Board's bailout programs were foreign banks.  In addition, the Fed had to pump $1.9 trillion into foreign swap lines in the 30 days after the collapse of Lehman Brothers and $5.4 trillion in the 90 days after its collapse.  And, that's just the tip of the iceberg of everything the US and US taxpayers did to bailout the global financial system in 2008-2009.  

Why did the US government do this?  Because the global financial system is highly interconnected and many of these foreign activities and banks were dealing Wall Street's megabanks and, if they failed, the entire financial system would collapse along with our entire economy, ushering in a Second Great Depression, which was just barely avoided last time. 

All of that is going to cost the US more than $12.8 trillion and it'll happen again next time as well unless strong, effective financial reform is put in place, including very strong cross-border regulations. 

The fight over cross-border regulation has many aspects, some of which are summarized in the attached PowerPoint presentation that we've been using lately to rebut the latest baseless objections to the CFTC's overdue and essential actions, including:

- the SEC's recently proposed cross-border rule is inapplicable to the CFTC's much stronger cross-border guidance, which is required by entirely different statutory provisions; 

- the SEC has jurisdiction for no more than 3.5% of the derivatives markets and the CFTC has jurisdiction for more than 96.5% of the markets, plus decades of expertise and experience in regulating them;

- the SEC's proposed rule is weak and will be ineffective, likely acting as a starting gun for a global race to the regulatory bottom;

- the protection of US taxpayers and treasury should not be outsourced to foreign regulators (so called "substituted compliance") because they have repeatedly failed their own depositors, taxpayers and treasuries;

- the US must not wait years for foreign regulators to pass and implement comprehensive Dodd Frank/Title VII-like derivatives regulation before putting effective cross-border regulation into effect; and 

- there are no current conflicts with foreign regulations, laws or rules.

In addition to the attached Power Point, here are more materials on the cross-border issue:

1. Better Markets has filed 8 comment letters on Cross-Border rulemakings:

Letter to CFTC regarding Cross-Border Application of Certain Swaps Provisions- August 16, 2012

Letter to CFTC regarding Cross-Border Application of Certain Swaps Provisions- August 27, 2012

Letter to CFTC Regarding Proposed Further Interpretive Guidance and Policy Statement: Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act- February 15, 2013

Letter to SEC regarding Cross-Border Security-Based Swap Activities- August 21, 2013

Letter to CFTC regarding Exemptive Order Regarding Compliance With Certain Swap Regulations- August 21, 2013

Letter to CFTC regarding a Request for Comment on Application of Commission Regulations to Swaps Between Non-U.S. Swap Dealers etc. Located in the United States- March 10, 2014

Letter to the Financial Stability Board on Cross-Border Recognition of Resolution Action- December 1, 2014

Letter to IOSCO on Cross-Border Regulation – February 23, 2015

2. Other Better Markets' Letters to regulators on cross-border

Better Markets sent a letter to commissioners and staff of the SEC on cross-border regulation on April 19, 2013

Better Markets sent a letter to commissioners of the CFTC urging them to pass strong cross-border regulation on June 24, 2013

Better Markets sent a letter to Treasury Secretary Lew on cross-border regulation on June 26, 2013 

Better Markets sent a letter to Commissioner Gensler and Commissioner White on cross-border regulation on July 3, 2013

Letter from Senators to Chairman Gensler

Letter from Senators to Secretary Lew

3. Press Releases / Statements:

Only Time Will Tell If the CFTC's Future Partial Regulation of Cross-Border Derivatives Dealing Will Be Adequate to Protect the American People from Another Financial Crisis Ignited by Derivatives

The CFTC Must Protect the American People from Unregulated Overseas Activities

The SEC’s Proposed Cross-Border Rule is a Major Disappointment and Puts the American People at Grave Risk from Wall Street’s Overseas Activities

After Two and a Half Years of Consideration, the CFTC Must Delay No More and Must Act to Protect Main Street from Wall Street’s Cross-Border Derivatives Trading

Wall Street’s Latest Anti-Reform Tactic: De-guaranteeing Overseas Affiliates

SEC’s Incomplete Rules Today Invite More Wall Street Evasion and Needlessly Expose US Taxpayers to More Bailouts

Statement on Chairman Massad’s Remarks on the Need for Strong Cross Border Regulation

4. Related Better Markets Court Filings

Better Markets Brief of Amicus Curiae in the case of SIFMA v. CFTC filed March 19, 2014

5. Related Blog Posts and Fact Sheets

The "De-guaranteeing" Fraud: Wall Street's Latest Cross Border Gamble 6-19-2014

Cross-Border De-guaranteeing Factsheet 6-19-2014

Senators' Letter To Treasury Secretary Lew On Cross Border Wrong On The Facts: 6/26/2013

Fund The CFTC & Stop The Crooks & Predators From Ripping Off America’s Farmers & Families: 7/16/2012

6. Important articles on cross-border:

U.S. banks moved billions of dollars in trades beyond Washington’s reach (August 21, 2015)

The Old New Financial Risk (April 28, 2015)

Here’s How to Ensure Big Banks Don’t Need Another Bailout (August 8, 2014)

Big U.S. Banks Make Swaps a Foreign Affair (April 27, 2014)

U.S. court rules against banks in swap rules lawsuit (September 16, 2014)

The Next Financial Crisis Is Brewing Right Now, and Regulators Are Missing It (July 3, 2014)

Another Failure to Regulate Derivatives (July 2, 2014)

S.E.C. Limits Derivatives Trading by Foreign Branches of U.S. Banks (June 25, 2014)

SEC Extends U.S. Swaps Clampdown to Guaranteed Affiliates (June 25, 2014)

Exporting U.S. Rules for Foreign Banks (January 22, 2014)

CFTC Is Poised to Expand Its Reach Overseas (December 16, 2013)

CFTC sued by trade groups over swaps rules (December 4, 2013)

EU urges US to delay swaps reform (September 30, 2013)

Reckless Banking, Inadequate Rules (July 12, 2013)

U.S. Regulators Approve Stricter Trading Rules Overseas (July 12, 2013)

Transatlantic swaps deal averts market crunch (July 11, 2013)

Europe, U.S. strike peace on cross-border swap rules (July 11, 2013)

CFTC's Gensler Is Right on Need for Derivatives Rules Now (July 10, 2013)

Mark Wetjen - Wall Street Shill or Main Street Hero? (July 8, 2013)

The Latest Assault on Bank Reform (July 4, 2013)

Senators Urge CFTC, SEC to Close Major Swaps Loophole and Prevent Bailouts from Implied U.S. Guarantees on Swaps (July 3, 2013)

Deadline on Trading Rules Abroad Splits an Agency (July 2, 2013)

EU Accuses 13 Banks of Hampering CDS Competition (July 1, 2013) 

Whose rules apply when derivatives cross borders? (June 27, 2013)

Gensler Rejects Cross-Border Compromise as Delay for Wall Street (June 26, 2013)

Warren: Don’t delay on cross-border derivatives rules (6/20/13)

Wall Street Journal: Gensler Sticks to Swaps Plan (June 20, 2013)

Wall Street Journal: U.S. Rules on Swaps Face a Barrier Abroad (June 9, 2013)

Financial Times: Foreign derivatives push divides US regulator (June 6, 2013)

Bloomberg: Europe Seeks CFTC Delay in Imposing Swaps Rules on Banks (May 30, 2013)

New York Times: A Disappointing Debut (May 5, 2013)

New York Times: The Case for Megabanks Fails (May 2, 2013)

Bloomberg: Deutsche Bank Warns of Failures Under Proposed U.S. Rules (May 1, 2013)

How Wall Street Defanged Dodd-Frank (April 30, 2013)

Compliance Week: Bills Chipping Away at Dodd-Frank Hop One Hurdle, Next Vote April 11 (March 25, 2013)

Mother Jones: Sneaky House Bill Would Gut Financial Reform (March 21, 2013)

Bloomberg: Barnier Tells EU Lawmakers in letter Not to Block Swaps Rules (January 31, 2013)

Corporate Crime Reporter: Better Markets’ Kelleher Rips CFTC’s Cross Border Trading Exemption (December 22, 2012)

Bloomberg: Dodd-Frank Swap Rules Delayed Six Months for Overseas Trades (December 22, 2012)

New York Times: A Debate Goes Behind Closed Doors (June 22, 2012)

Financial Times: CFTC member warns US cannot be ‘financial policeman’ (September 13, 2011)

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