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EU, Japan urge US to curb reach of derivatives rules

LONDON -- Britain, France, Japan and the European Union have called on the United States to limit the cross-border reach of its new derivatives rules to avoid fragmenting markets at a time of economic weakness.

Leaders from the Group of 20 major economies agreed at the height of the financial crisis to introduce rules that require the clearing and reporting of derivatives trades by the end of this year, to make the market less fragile.

Rules proposed by the U.S. Commodity Futures Trading Commission (CFTC) could bring dealers outside the United States within their scope.

British finance minister George Osborne and his French and Japanese peers Pierre Moscovici and Ikko Nakatsuka, as well as EU financial services chief Michel Barnier, have written a joint letter to CFTC chairman Gary Gensler, asking him to limit the cross-border influence of his regulations.

“At a time of highly fragile economic growth, we believe that it is critical to avoid taking steps that risk withdrawal from global financial markets into inevitably less efficient regional or national markets,” the letter dated Oct. 17 said.

The letter urged countries to recognize each other's rules, meaning the CFTC should rely on European or Japanese authorities for regulating derivatives activities involving U.S. firms outside the United States.

A U.S. reform of Wall Sreet, known as Dodd-Frank after the two politicians who drew them up, could require swap dealers outside the United States to seek authorization from the CFTC if one of the counterparties to a derivatives contract is a “U.S. person,” meaning an individual or firm.

There has been some talk in foreign exchange markets that the Dodd-Frank rules are already causing a withdrawal from U.S. counterparties by dealers outside America.

“We have noted concern among non-U.S. banks, particularly in Asia that receiving U.S. names as a counterparty ... may bring them into the scope of Dodd-Frank rules,” said Alex McDonald, at the Wholesale Markets Brokers' Association.

But another person active in foreign exchange markets said that shutting out business partners because of the CFTC rules would be premature because they are not finalized.

“It's only guidance at the moment. We just have to wait until the rules by the CFTC are clarified. Until then it's all speculation,” this person said, asking not to be named because he was not authorized to speak to journalists.

Several countries have already called on the United States to rethink another part of Dodd-Frank — the Volcker Rule, which bans deposit-taking banks from taking bets on the market — fearing it would crimp government debt trading abroad.

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