CFTC extraterritoriality warning branded political

US threats to strictly apply Dodd Frank swap rules on foreign units of banks like J.P. Morgan owe more to the election cycle than practical financial market supervision.

US threats to strictly apply Dodd Frank swap rules on foreign units of banks like J.P. Morgan owe more to the election cycle than practical financial market supervision.

The statement follows a speech by Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), who stated his intention to apply new swaps rules to overseas branches and affiliates of US firms.

Speaking at an annual conference held by the Financial Industry Regulatory Authority (FINRA), Gensler said the agency would soon seek comment on the cross-border application of Title VII of the Dodd-Frank Act, which covers the new swaps rules.

Title VII mandates the central trading and clearing of OTC derivatives trades that can be standardised. Those instruments that cannot be standardised will be subject to higher capital charges and all OTC derivatives will be subject to more detailed data collection.

Sharper focus on how Dodd-Frank should be applied to overseas subsidiaries and branches of US-based firms has followed the surprising losses of at least US$2 billion recently uncovered by J.P. Morgan.

The loss originated through credit derivatives traded from J.P. Morgan’s London-based chief investment office, reportedly created to hedge the bank’s open positions. However, the division is thought to have repeatedly taken a view on the market and engaged in prop trading activity.

Speaking on the loss, Gensler said the incident served as a “stark reminder of how trades overseas can quickly reverberate with losses coming back into the United States”. 

“It appears that the bank here in the US is absorbing these losses…. as a US bank, it is an entity with direct access to the Federal Reserve’s discount window and federal deposit insurance,” he added.

Gensler said that cross-border consultation would recommend that a foreign entity engaging in more than a ‘de minimis’ level of US-facing swap dealing activity would be required to register with the regulator, propose a definition of US-facing swap dealing activity and suggest a tiered approach for capturing overseas swap dealers.

But Alex McDonald, CEO of the Wholesale Markets’ Brokers Association, an interdealer broker trade body, suggested that more leeway would be need to be given to foreign subsidiaries of US companies to ensure the new rules were applied effectively.

“The speech had no mention of the need for recognition of hosting third country rules or of any passport regime, which need to be in place for rules that involve global market participants trading in global products,” McDonald told “But it is important to note that this was not a policy paper, but a speech in an election year that was bound to have a strong US-centric focus.”

During his speech at the FINRA event, Gensler cited the need to comply with the Dodd-Frank requirements of applying swaps rules to activities that have “a direct and significant connection with activities in, or effect on, commerce” in the US, and consider the “integrated web” of legal entities that can make up a single US-based company and have a direct effect on US business.

“Some commenters have expressed the view that if a transaction is done offshore, it should not come under Dodd-Frank,” said Gensler. “Others contend that as long as an offshore dealer is regulated in some capacity elsewhere, many of the Dodd-Frank regulations applicable to swap dealers should not apply. But the law, the nature of modern finance, and experience strongly suggest otherwise.”

Despite little mention of how the CFTC would work with other regulators in other countries when it comes to resolving extraterritorial issues, McDonald said such cooperation would need to be considered eventually.

“If a UK subsidiary is already regulated by the Financial Services Authority, for example, you simply can’t be regulated by the US as well without some formalisation and rewriting of the ‘home/host regime’, into a ‘home/other home regime’,” said McDonald. “The very fact that Gensler is being explicit on the handling of foreign subsidiaries must mean that recognition of overseas regulation has also been discussed. Otherwise firms could be dual regulated, which will not work from a trading, clearing and reporting standpoint.”