By Douwe Miedema
WASHINGTON (Reuters) - The United States granted foreign banks a reprieve from some of its new rules for risky derivatives, putting itself on a collision course with overseas regulators who want more reliance on home-country rules.
The U.S. swaps regulator laid out which of its new rules foreign banks have to comply with if they trade with American clients, or even if they deal with customers in their own country from an office in the United States.
The Commodity Futures Trading Commission granted exemptions in the area of how banks manage risk, but banks will largely need to comply with the cross-border rules for data reporting, swaps trading, and for clearing trades.
That is bound to disappoint foreign regulators, who had asked for more so-called substituted compliance, a legal concept that allows U.S. regulators to rely on foreign regulators for non-U.S. companies.
The CFTC did say however, that it could still make changes in the future, if it were asked to do so.
"To the extent that a jurisdiction wishes to knock on the door of this Commission ... (it) stands ready to consider those submissions," CFTC Chairman Gary Gensler said on a conference call with journalists.
The lucrative swaps market, which was long unregulated, has $630 trillion worth of contracts outstanding and is dominated by Wall Street banks such as Citigroup Inc, Bank of America Corp and JPMorgan Chase & Co.
Politicians across the world agreed to clamp down on Wall Street after the 2007 to 2009 credit meltdown, but different countries have since worked on rules that are not always identical, and that have different time frames.
Under the chairmanship of Gensler, who himself oversaw swaps trading at Goldman Sachs earlier in his career, the CFTC has aggressively implemented these new rules, sometimes putting it years ahead of other jurisdictions.
It had temporarily lifted many of its rules, but they kick back in on Saturday, and the decision determines in which cases foreign banks can rely on comparable rules at home.
The three Democrat members of the CFTC voted in favor of the determination - which is valid for Europe, Australia, Canada, Hong Kong, Japan and Switzerland - while the only Republican, Scott O'Malia, dissented.
Wall Street groups sued the CFTC this month, hoping to beat back the cross-border guidelines that they fear may hurt markets and cut profits.
Europe and regulators elsewhere have also frequently complained about the lack of cooperation, writing several letters to U.S. authorities and testifying in U.S. Congress and during hearings at the CFTC.
Two sources close to the European Union said earlier in the day that Brussels was still unhappy with the CFTC's plans, and that the same was true for other jurisdictions.
The spat over how to regulate the market looms despite the "Path Forward" deal struck between the European Union and the CFTC in July, when the two sides said they were confident they could hammer out an understanding.
But in recent negotiations, "the (U.S.) colleagues were saying: 'Yes that's what we wrote, but it is a complex matter and you've misinterpreted it," one of the sources said.
The source also criticized that the CFTC had not drawn up Memoranda of Understanding, documents that say how it cooperates with foreign regulators.
In Friday's determinations, the CFTC did not grant substituted compliance for clearing, rules for which are not yet in place in the European Union.
It also did not address rules for trading on exchange-like platforms, which will kick off next year, even though the agency did give the banks some more time to meet some of the obligations for data reporting.
It did allow use of the foreign rules in areas such as requirements for business continuity, chief compliance officers, risk management programs and other such so-called entity-level requirements.
"It was my hope that the Commission would work with foreign regulators to implement a substituted compliance process that would increase the global harmonization effort. I am disappointed that the Commission has failed to implement such a process," said the CFTC's dissenter, O'Malia.
(Reporting by Douwe Miedema; Editing by Lisa Von Ahn, Andre Grenon and Lisa Shumaker)