By ANDREW ACKERMAN and KATY BURNE
The Commodity Futures Trading Commission is preparing to ease restrictions on swaps trading overseas, according to people familiar with the matter, a move that could shift some trading abroad as banks and other firms look for ways to circumvent tough U.S. rules.
CFTC officials are expected to reach an agreement with counterparts in the European Union as early as this week, these people said, to allow U.S. firms to trade swaps on European platforms as long as those systems are governed by swaps rules that are comparable to those ushered in as part of the 2010 Dodd-Frank law.
Critics say the agreement will encourage banks to move more swaps trading overseas to escape strict U.S. regulations intended to bring more transparency to the opaque financial products. Swaps, which were at the heart of the 2008 crisis, are complex contracts that allow financial firms and their clients to hedge against risks or bet on an asset's value.
Europeans have often lagged behind the U.S. in crafting post-financial-crisis rules. While U.S. trading restrictions are to go into effect on Feb. 15, Europe has yet to set a date for the implementation of its swaps-trading rules, which have only been agreed upon and some fear aren't as strict as U.S. restrictions.
The move is a shift for the CFTC, which, under the leadership of former chairman Gary Gensler, pushed to impose U.S. rules abroad. Mr. Gensler, who stepped down as chairman last month, said he feared a repeat of the financial crisis, when the solvency of companies like American International Group Inc. was threatened by trades executed by branches overseas.
Mr. Gensler's effort met resistance both from European policy makers, who complained the U.S. was unfairly imposing its rules abroad, and from U.S. policy makers, who urged the CFTC to better coordinate the adoption and implementation of U.S. swaps rules with foreign governments. Mr. Gensler declined to comment.
"I wouldn't say they are giving away the shop here, but it is clear that, since the departure of Chairman Gensler, the CFTC appears to be considering greater deference to foreign regulators [for swaps]," said Annette Nazareth, partner at law firm Davis Polk & Wardwell LLP. "They are considering not requiring some of these entities to be directly overseen by the CFTC, if they are appropriately regulated in their home jurisdiction."
In congressional testimony last week, CFTC interim Chairman Mark Wetjen said the CFTC has "made great progress" in its negotiations with European policy makers.
The pending agreement could complicate the nascent swaps-trading regime under way in the U.S., shifting trading away from the roughly 20 operators that have registered new swaps platforms with the CFTC ahead of the Feb. 15 start date.
U.S. platform operators could face increased competitive pressures from rivals abroad if the stance toward overseas platforms were relaxed. James Cawley, chief executive of New York-based Javelin Capital Markets LLC, which operates a swap-trading platform, said any easing of CFTC rules should be temporary and include periodic reviews to ensure Europeans are making progress with their rules.
CFTC officials say loosening the trading restrictions simply extends an earlier agreement between the EU and U.S.—known as the PathForward—to allow firms trading overseas to comply with certain swaps rules in their home countries.
"We continue to discuss the issues mentioned in the Path Forward," said Chantal Hughes, a spokeswoman for Michel Barnier, the EU's financial-services chief. She declined to provide additional detail.
The proposed exemptions could change before a final agreement is struck, the people familiar with the matter said. One person briefed on the pending agreement said the platforms would have to maintain exchange-like systems for pre-trade price transparency. And the exemptions don't change requirements global regulators have set for most swaps trades to be publicly reported and routed to central clearinghouses that guarantee the trades. The CFTC and EU regulators are working to make sure their reporting and clearing requirements are aligned and could effectively be substituted for each other.
On Monday, the CFTC separately granted a three-month delay to a requirement that firms trade so-called "package" trades on electronic platforms beginning Feb. 15. Package trades are multipart transactions that are priced as one unit. That three-month period will give the industry and the CFTC time to work through technological and operational hurdles. Package trades constitute as much as half of the swaps market, depending on how they are defined.
In prepared remarks Monday, CFTC Commissioner Scott O'Malia said the agency had adopted an appropriate process for reviewing routine swaps being listed on U.S. platforms, but said the agency needed to "complete some additional analysis" before bringing package transactions under the new U.S. trading rules.
Robert Pickel, chief executive of the International Swaps & Derivatives Association, last month requested that swaps priced as part of a package not be subject to the new trading requirements. He said the rules would "impose unnecessary burdens on market participants" and that granting an exemption "would not reduce reporting or post-trade transparency."