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Regulators agree on global swap rules ahead of G20 summit

Douwe Miedema

By Douwe Miedema

WASHINGTON (Reuters) - Finance watchdogs on Friday laid out joint rules for the $630 trillion derivatives industry that was at the core of the 2007-09 credit meltdown, in a report to the G20 most powerful economies of the world.

The high-level agreement comes ahead of a G20 summit next week in St Petersburg, Russia, where world leaders will discuss progress they have made to tighten the rules for banks and prevent a repeat of the devastating crisis.

While much progress toward the global reform agenda had been made, other points still needed to be sorted out, regulators from around the world said in a statement.

"The resolution of the unresolved issues is important," the group of supervisory agencies said in a report that was disseminated by the U.S. Commodity Futures Trading Commission, the country's top derivatives regulator.

Diverging views on how to rein in the banks that dominate derivatives trading caused a trans-Atlantic rift last year between Gary Gensler, head of the CFTC, and politicians and regulators in Europe and elsewhere.

But in July, the CFTC reached an agreement with the European Union that allowed foreign branches of banks to comply with local rules, as long as they are compatible with the rules their parent organizations must obey at home.

Regulators from Australia, Brazil, Europe, Hong Kong, Japan, Canada, Singapore, Switzerland and the United States now also broadly subscribe to that view, they said, explaining how they would assess whether the rules are comparable.

The principle allowing a bank branch to comply with foreign rules is known as equivalence, or substituted compliance.

While seemingly abstract, minute details in the hundreds of pages of new regulation written after the crisis can have a life-changing impact on banks such as JP Morgan Chase & Co , Bank of America Corp or Citigroup Inc .

There could be an exception from the equivalence principle if a jurisdiction imposed requirements on trading that did not exist in the other jurisdiction, the regulators said.

In that case, the market parties would still have to comply with the requirements even if the rules in the two jurisdictions were comparable, the report said.

The same was true for clearing - the process where buyers and sellers send their orders through clearing houses, which function as traffic control centers.

Two areas still needed to be resolved, the regulators said. One was how to deal with local data protection laws that could block regulators' access to banks' books.

More work was also needed on the exact legal status of bank branches and guaranteed subsidiaries in foreign jurisdictions, something that can have an impact on whether the parent company is responsible for losses or not.

(Editing by Matthew Lewis)