Dodd-Frankenstein Set to Go Global: Investors Beware
Three years after Dodd-Frank came alive, the U.S. Commodity Futures Trading Commission was set to enforce its cross-border derivatives rules on July 12th, 2013. The CFTC has primary responsibility for overseas derivative trades (a small slice is reserved for the SEC) and has aggressively taken up the challenge to prevent another systemic financial crisis here in the U.S.
Many U.S. banks, hedge funds, and other financial institutions have entities established offshore ostensibly to get around the U.S. regulatory and tax regime. Many of the players pushing for this reform are happy to point out that all of AIG’s trades that brought down the company were booked in London. Until recently, Gary Gensler, CFTC Chairman, had resisted calls for further delay in the proposed rule implementation. A recent meeting with Treasury Secretary Lew seems to have altered his thinking.
What the new set of rules basically do is extend harsh new American regulations to any trade that involves a “U.S. person,” which includes entities substantially owned by Americans or primarily based in the U.S. So your hedge fund based in Cayman that is owned by an American will be covered.
The reasoning behind the new rules is to prevent the scenario of firms booking trades overseas in more friendly regulatory environments and having the consequences still flow back to the U.S. financial system. According to the CFTC, if there is no cross-border, there no reform.
The regulatory push has angered overseas officials, especially in Europe. It goes without saying that foreign governments are loath to be lectured on financial regulation by the United States given our recent history. There are also concerns that these rules will drive business away from American institutions to countries where the cost of following the rules is not so high. There is a substantive compliance rule in the new regulatory regime by the CFTC which allows for U.S. institutions to be governed by a foreign regulatory environment if they are building a framework similar to Dodd-Frank. This effectively gives foreign banks an advantage in compliance costs, albeit temporary.
How these changes will finally be implemented is unclear. Much depends on how foreign markets develop their own rules. Will they be put in place in a timely manner? Will they be sufficiently rigorous to satisfy American regulators? The bottom line is that you have another year to prepare for cross border derivative regulation but there is a big question mark as to how this compromise will finally be enforced. If you are involved in the cross border swap market, it is critical you pay attention to regulatory efforts in countries where you frequently trade.
How will it affect U.S. banks? Primarily, the result will be higher costs to the industry. If there is a prolonged advantage given to foreign banks, U.S. banks could lose market share. There could be a hit to earnings as swaps are a high margin business. The upside will be that if you put on a swap trade with a U.S. bank, you’ll be able to sleep better at night, compared to less regulated jurisdictions.
Born in Georgia and raised in Savannah, Todd spent his early summers in Carp Lake, Michigan listening to the vivid stories of his grandparents recalling their youth in the northern wilderness. Ever since his earliest days, he loved story telling.
Todd left Savannah in 1982 to attend the U.S. Air Force Academy in Colorado Springs, CO where he studied aeronautical engineering. Upon graduation in 1986, he immediately left the Academy for flight school. His initial assignment was flying Combat Search and Rescue helicopters at Elmendorf Air Force Base in Anchorage, Alaska. In the UHAE (Unique Harsh Arctic Environment-pronounced “Yoo Hay” by Alaskans) he flew local rescue missions and was also deployed throughout Asia. During this time he was credited with saving many lives and even more assists. In addition to flying exciting missions, Todd also managed to graduate from the University of Alaska Anchorage with an M.S. in Engineering Management. In 1990 he volunteered for Special Operations and went back to flight school. In 1991 he was assigned to the 20th Special Operations Squadron at Hurlburt Field, FL, flying MH-53J Pave Low helicopters. Immediately he was deployed to Kuwait. Over the next three years he was active in classified missions in support of counterterrorism under the control of the National Command Authority and deployed throughout the world. His customers included SEAL Team Six and Delta Force. He left the Air Force as a Captain in 1994. During this hectic period in his life he found time to write his first novel, The Ultimate Solution which was never published. He did publish an article in the Armed Force’s Journal in 1994 on Special Operations Aviation.
1994 found Todd joining an investment bank and earning a chance to expand his knowledge of his other passion, Finance. During this second career he became highly knowledgeable in Emerging Markets Fixed Income and traveled a great deal internationally with a focus on the Caribbean. He has conducted business in over forty different countries. He became acutely aware of the consequences of economic decisions and their effect on national and economic security.
However, Todd.’s love of storytelling was uncontrollable. He left the financial business in 2011 to write. Currency was published in December of that year. Once he began typing, he never stopped.
Todd lives on a three-hundred year old farm in Connecticut deeded by King George of England with his children.