Pointing to international investment house failures that rebounded to their U.S. affiliates and ultimately the American taxpayer, Chairman Gary Gensler of the Commodity Futures Trading Commission (CFTC) said those foreign-based affiliates should come under the same market reforms being installed in the United States.

"Recent events at JPMorgan Chase are a stark reminder of how swaps traded overseas can quickly reverberate with losses coming back into the United States,

"We've seen this movie before. Financial institutions set up hundreds, if not thousands, of legal entities around the globe. During a default or crisis, risk inevitably comes crashing back onto our shores. We all remember AIG, Lehman Brothers, Citigroup, Bear Stearns and Long-Term Capital Management.

"AIG's subsidiary AIG Financial Products brought down the company and nearly toppled the U.S. economy," Gensler said in a speech at the Sandler O'Neill Global Exchange & Brokerage Conference in New York. The AIG subsidiary was run out of London as a branch of a French-registered bank, though technically it was organized in the US.

Citigroup provided another example, guaranteeing numerous structured investment vehicles (SIV) that were launched out of London and incorporated in the Cayman Islands. When they were about to fail, the U.S. Citigroup assumed the huge debt, and taxpayers later bore the brunt with two multi-billion-dollar infusions.

"I believe that swaps market reform should cover transactions not only with persons or entities operating in the U.S. but also with their overseas branches. In the midst of a default or a crisis, there is no satisfactory way to really separate the risk of a bank and its branches. Likewise, I believe this must include transactions with overseas affiliates that are guaranteed by a U.S. entity, as well as the overseas affiliates operating as conduits for a U.S. entity's swaps activity," Gensler said.

Commissioners now are reviewing the staff recommendation on the cross-border application of swaps market reforms.

Gensler also warned that only market failure and mayhem would result from congressional cuts in CFTC funding, which have been lobbied for by Wall Street. A lack of personnel will simply slow the process (see related story).

Nearly four years after Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commission has completed 33 of the reforms called for with fewer than 20 to go. Currently, the CFTC staff is preparing recommendations on clearing requirement determinations.

"The first determinations will be put out for public comment this summer and hopefully completed this fall," Gensler said. They are likely to begin with standard interest rate swaps, as well as a number of CDS indices. "Staff is recommending that we propose a requirement for fixed-to-floating interest rate swaps, basis swaps, forward rate agreements and overnight index swaps in four currencies: U.S. dollars, Euros, British pounds and Japanese yen.

"For CDS indices, the requirement likely will cover certain North American investment-grade and high-yield CDX indices, as well as certain European iTraxx, high-volatility and crossover iTraxx indices."

The Commission staff has made recommendations and the CFTC will soon consider a final rule on the implementation phasing of the clearing requirement and the end-user exception.

"For market participants trying to plan for the first clearing determinations, though, I don't have a specific date, if we're able to put a proposal out next month, the determinations could be as early as October," the CFTC chairman said.

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