US banks that have traded derivatives via overseas subsidiaries to avoid Dodd Frank rules, under a CFTC exemption allowing them to do so, will need to make some difficult decisions come July 12. That’s when the exemption expires, unless lobbyists convince CFTC commissioners to extend it.
Companies, especially multinationals, with overseas hedging relationships with US banks will need to consider how the expiration of the rule will affect those relationships. Will the banks step back from the markets or change their pricing, leaving local banks in a competitive position? Or, as some are considering, will they simply ignore the expiration, hoping that the CFTC will not pursue them for noncompliance.
IFR magazine reported on June 28 that some lawyers for US banks have suggested that the CFTC is unlikely to take noncompliance action against the banks because of the legal complexity of such a move, which is complicated by the vagueness of the rules. For example, according to IFR, the definition of the term “US Person” has changed four times in the last year or so.
The CFTC could run a risk if it pursued a noncompliance action unsuccessfully. If it fails, the commission’s enforcement authority could be punctured by an unfortunate precedent. While banks will be loath to go toe to toe publically with a major regulator, there could be some behind-the-scenes horse trading around the deadline.