According to a Wall Street Journal article published this week, foreign banks and funds are becoming increasingly concerned that U.S. regulators will extend their activities overseas and enforce risk mitigation portions of the Dodd-Frank Act abroad. Current proposed rules allow regulators to regulate the swaps market and require that all foreign entities to conduct swaps in an exchange, post margin and hold sufficient capital.

Foreign central banks have already been outspoken on the potential for international actions by U.S. regulators. The European Central Bank (ECB), the Bank of France, China’s sovereign wealth fund and the China Investment Corporation have all signaled their displeasure and said the regulations would be an overstep of U.S. authority. A May 6th letter from the ECB to U.S. regulators said “it would be inappropriate to be subject to supervisory requirements by a non-EU authority.”  

The CFTC and SEC are currently reaching out to the Fed for guidance on international swaps rules. According to U.S. officials, one option regulators could pursue to exempt foreign banks would be to exclude entities that are well-regulated or that are well-capitalized from regulation; however, no decisions have been made.  

U.S. regulators have expressed that there are good reasons to include some foreign institutions in their rulemaking, including sovereign wealth funds. Michael Barr, a former Assistant Secretary at the Treasury Department said “it makes sense to treat sovereign-wealth funds the way you would any other financial player in the marketplace” and that they “ought to be bound by the same rules because derivative transactions with them pose the same risks to the financial system as transactions with hedge funds and other investment vehicles.”  

CFTC Commissioner Jill Sommers, who has been outspoken in her dissent to several aspects of regulatory reform, said that foreign entities have legitimate concerns and their views should be factored into final rules. Additionally, when she testified before the House Agriculture Subcommittee on General Farm Commodities and Risk Management, Sommers warned that there are substantial differences between U.S. derivatives reform and international efforts.