[ by Howard Haykin ]

Too Many Players, Each With Their Own Objectives, Unable To Agree or Compromise

The new, tougher rules for governing complex derivatives have little chance of becoming effective anytime soon - certainly they won't be in place by year-end, a self-imposed deadline.  Significant differences separate the regulators from numerous countries, and there are no proposed agreements on the table nor any firm target dates for completing the rule overhaul for the swaps market.

Swaps create an opaque web of loosely regulated obligations between firms. The financial crisis exposed the risks of those agreements as the U.S. government bailed out American International Group, fearing that the insurer was so interconnected with other firms that its collapse could be catastrophic.

Yet, because AIG's swaps deals were transacted in London, U.S. lawmakers outlined a new regulatory regime as part of the Dodd-Frank overhaul law to include any swaps deals by U.S. firms or foreign financial institutions that do substantial business in the U.S.  In turn, U.S. officials are trying to prod the rest of the world to go along with tightened rules being created in the U.S.  Resistance has been widespread.

Regulators in the U.K., Japan, Singapore and Hong Kong, for example, seek an extension - anywhere from 6 months to a year, to an indefinte deferral.  Singapore is the one pushing for an indefinite deferral - i.e., until "international consensus" can be reached on the details.

Issues with Implementing Dodd-Frank. First, the Dodd-Frank Act has seen other target dates and deadlines come and go, prompting some U.S. regulators to abandon their earlier timeline projections.

There's also the matter of the 2012 elections, which render most other government agenda items as irrelevant or of low-priority.

While world leaders agreed to create a foundation of rules for governing complex derivatives, this important task is but one item on a very long list of changes that was created after the financial crisis. 

And then, there are international banking rules, which are needed to improve the safety of the financial system and alter executive compensation to discourage risk taking.  The progress on those rules have slowed to a crawl.

U.S. Swap Rules. Big U.S. banks and other firms that trade swaps are preparing to start complying with major new swaps rules at the beginning of 2013.  U.S. regulators have proposed giving foreign firms that do business with the U.S. until July 2013, unless their home jurisdiction has produced a comparable regulatory regime by then.  Yet, this approach has angered foreign regulators who charge the U.S. with trying to reach beyond its boundaries.

Wall Street and regulators readily agree that the U.S. cannot enact its rules without other countries enacting their respective rules.  To apply rules to the U.S. portion of the market could have the effect of pushing trading into more lenient jurisdictions, which would hurt the bottom lines of U.S. firms and fail to protect them in the event of another crisis.

"You might see a lot of activity move elsewhere and as we know with these markets, if it moves elsewhere, there's no guarantee it will come back."  -- Robert Pickel, CEO of the ISDA (International Swaps and Derivatives Association).

If the CFTC goes forward with the short-term extension, it could give regulators time to catch up or prepare for a similar showdown next summer.  [C-I:  Something to look forward to.]

For further details, go to:  [WSJournal, 9/18/12].