EU's Barnier voices concern on U.S. derivatives rules

European Union's Internal Market Commissioner Michel Barnier addresses a news conference on the progress of the single market and the 2011 governance check-up report in Brussels February 27, 2012.

BRUSSELS (Reuters) - The European Commission has urged regulators in Washington to delay elements of new derivatives regulation, fearing that confusion surrounding some of the rules will harm EU banks operating in the United States.

The U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission finalised rules last week that will determine which firms involved in trading swaps must register with regulators and back up trades with more capital and collateral.

Both agencies were mum on how the requirements would apply to U.S. and foreign banks with overseas operations.

However, CFTC Chairman Gary Gensler floated the idea of a phase-in period for certain requirements for firms facing swaps regulations in more than one country.

The Dodd-Frank financial reform law calls for regulators to police the swaps market more closely after widespread ignorance about swaps exposure, especially at insurer American International Group (AIG.N), exacerbated the financial crisis.

The rules are the latest step in a global bid to reform opaque and unpredictable derivatives markets and follow an EU move earlier this year to overhaul regulation.

However, Michel Barnier, the European commissioner in charge of financial regulation, is concerned about how the new rules will affect EU firms and has written to the U.S. Treasury, the CFTC and the SEC, asking them to delay certain provisions.

"I would strongly encourage you to delay the swap dealer registration process for EU firms until there is legal clarity about the substantive conditions that such registration will entail," he wrote last week to SEC Chairman Mary Schapiro.

'SWAP DEALERS'

Under the Dodd-Frank Act, firms using derivatives must register as 'swap dealers' with the U.S. authorities, a requirement that could apply to EU groups active on U.S. derivative markets.

Brussels is worried that such a requirement would mean EU firms were subject to U.S. rules that would overlap with EU law.

"These EU firms are already subject to strict regulation and supervision in the EU," the spokeswoman added. "The 'swap dealer registration' rules are creating confusion to EU banks operating in the U.S., as the substantive conditions that will apply are not yet known.

"The (European) Commission has consistently argued that new global regulation on (over-the-counter) derivatives must be coherent and avoid exposing firms to overlapping or diverging requirements in different jurisdictions," Barnier's spokeswoman said.

Bart Chilton, a Democratic Commissioner at the CFTC, said it was important to confer with other regulators on the global swaps regime, but noted the agency has to balance other concerns too.

"Congress gave us a locked and loaded timetable in which to get the rules in place," he said. "The high wire act here is doing what Congress told us to do to protect consumers, markets and our economy, while balancing the harmonisation of global financial regulations to the greatest extent practicable."

The CFTC originally said in December 2010 that firms would be counted as swap dealers if they traded more than $100 million in swaps over a 12-month period.

Following a push by energy firms and big commodity traders, that threshold has been bumped up to $8 billion for most asset classes in an initial phase-in.

CFTC Chairman Gary Gensler last week said the Commission hoped to put out a request for public comment on the cross-border application of U.S. swaps rules in the next month or two.

Speaking just before the vote on swap dealers, Gensler said the agency could use an "exemptive order" to provide relief to firms facing overseas swaps regulation.

"I also believe that it would be appropriate through an order to think about a phased-in compliance for certain requirements of this cross-border swap circumstance," he said.

In February, the agency, together with the SEC, released a report saying there may be kinks to work out with international derivatives reforms, but said it was "still too early" to determine where the kinks were.

Derivatives, such as options, futures and swaps, derive their price from an underlying asset, with such contracts drawn up between parties setting out conditions under which the contract may or may not pay out.

The opacity of the market for such instruments led billionaire investor Warren Buffett to describe them as weapons of financial mass destruction.

The nature of the market for credit default swaps (CDS), for example, made it difficult to predict the fallout of a Greek debt default or similar dramatic event.

Earlier this year, the European Union agreed to overhaul regulation of the roughly $700 trillion derivatives market.

The new regime, which could be largely in place by the end of 2012, will overhaul a market that boomed in the decade before the economic crash and was blamed for amplifying the crisis by hiding risks from regulators.

(Reporting By Alexandra Alper; Editing by Dan Grebler)