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U.S. watchdog gives foreign banks more time on swap rules

Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), listens during an interview with Reuters in London October 2, 2012. REUTERS/Simon Newman

By Douwe Miedema

WASHINGTON (Reuters) - The U.S. swaps regulator issued a temporary reprieve from its rules for foreign banks after closing a loophole that had allowed trading to continue outside regulated platforms in the United States.

Led by Gary Gensler, a former Goldman Sachs investment banker, the Commodity Futures Trading Commission has issued a slew of new requirements to get a grip on the $630 trillion swaps market after the devastating 2007-09 financial crisis.

One of the most controversial issues is how its rules apply abroad, particularly because regulators in Europe and Asia have not proceeded as quickly as the CFTC in implementing a 2009 global pact to reform markets.

The CFTC on November 14 made clear that foreign banks doing derivatives deals with foreign clients from Wall Street or other U.S. offices still needed to comply with some of the agency's rules for swaps trading.

That triggered prominent Republicans in the House of Representatives to throw their weight behind industry complaints that the CFTC was confusing markets.

Much of their wrath was aimed at the fact that the November 14 rule came out as an "advisory," also issued by staff, which does not require a CFTC vote and is therefore less accountable, according to these critics.

Citing concerns expressed by foreign banks, the CFTC has now given them until January 14 to comply with its new advisory, in a so-called no-action letter, issued by staff.

The highly lucrative derivatives industry, which generates an estimated $40 billion in annual revenues for Wall Street banks, has long been an opaque business, but trading is now moving on to more transparent platforms.

The European Union had previously agreed with the CFTC on how to treat foreign derivative traders operating within their territories after a months-long trans-Atlantic rift, saying they would rely more on each other's rules.

The CFTC is currently engaged in the painstaking process of comparing the U.S. rules and those of other major financial centers, to see where it can allow swap traders to comply with the local rules, and where its own rules apply.

That process needs to be finished in December, just days before Gensler leaves the office.

(Reporting by Douwe Miedema, editing by G Crosse)