WASHINGTON/BRUSSELS (Reuters) - The European Union agreed with U.S. regulators Thursday on how to jointly supervise foreign derivatives traders operating in their territories, solving a months-long trans-Atlantic rift.
The two sides said they would rely more on each other's rules - drawn up to make banking safer after the 2007-09 credit meltdown - and will allow banks some flexibility to get out from under the most cumbersome new oversight.
"Our discussions have been long and sometimes difficult, but they have always been close, continuous and collaborative talks between partners and friends," said Michel Barnier, the European Commissioner in charge of regulation.
The U.S. derivatives regulator, the Commodity Futures Trading Commission (CFTC), and the EU's executive, the European Commission, announced a "path forward" on a package of measures that laid out how to apply the rules across borders.
The two sides are writing a raft of new rules to make the $630 trillion derivatives market safer, and prevent a repeat of the costly bank bailouts after the crisis.
"What the banks want more than anything else is just to understand what rules apply when," said Joel Telpner, a New York-based partner at law firm Jones Day.
"Even if they don't like where this is coming out, they're going to benefit significantly from the clarity."
Gary Gensler, chairman of the CFTC, had long insisted that foreign companies should comply with the agency's rules if they trade risky derivatives with U.S. firms.
Barnier, bank lobbyists and a growing chorus of U.S. politicians have chided the former Goldman Sachs (GS.N) banker over his intransigence, urging him to rely more on foreign regulators who are drawing up similar rules.
Reuters first reported that Gensler was within reach of an agreement with Barnier, which would give Gensler a bargaining chip to push a deal through the CFTC, which itself has been divided over the issue.
The CFTC is set to vote on its so-called cross-border guidance on Friday, the last day it can do so because a broad temporary relief for foreign companies expires. Having no rule in place would cause regulatory confusion.
It had long been unclear whether Gensler would be able to round up the required three votes for the plan, with fellow Democrat commissioner Mark Wetjen urging for more reliance on the rules written by foreign regulators.
But the two were now within reach of a compromise, a source close to the negotiations said on Wednesday, which would secure a key swing vote for the plan.
Barnier is scheduled to visit Washington next week, and the deal with Gensler will help address a bone of contention in international trade between Europe and America as they embark on talks towards a landmark free trade agreement.
The deal comprises a host of detailed new regulations for buyers and sellers of swaps, laying out how to register their business, what rules there are for trading, what data they must report, and how to reduce risk.
The swaps market enables clients to exchange virtually any type of financial risk, and has mushroomed into a huge playground for speculators out of sight from regulators from modest beginnings in the mid-1980s.
Banks had been complaining that they would be subject to different and sometimes conflicting sets of rules, and that clients would do business with banks in their own region only, fragmenting global financial markets.
Under the terms of the deal, a New York bank will have leeway to use a European exchange to buy and sell derivatives as long as these are registered in the United States, which most of these trading venues have long been.
The CFTC also promised to give more time to market parties wanting to trade on a European swaps exchange, in case Europe had not finished its own rules by the time the U.S. laws for these platforms kick in next year.
Clearing houses - traffic control centres that stand between buyers and sellers of swaps to reduce risk - could continue their work with foreign clients even if they weren't registered in one of the two jurisdictions.
Market parties will also be allowed to choose between EU or U.S. rules that determine risk mitigation for non-standardized swaps that do not go through clearing houses.
One lawyer at a large bank said that the agreement soothed fears that a lack of regulatory clarity could impact trading activity abroad as clients were unsure which rules applied to which types of trade.
The CFTC also said it would close a loophole that had allowed hedge funds to avoid most of its rules because their funds are incorporated in the Cayman Islands, which means they are not U.S. persons by law.
Additional reporting by Lauren LaCapra and David Henry in New York; Editing by Robin Emmott, Tom Pfeiffer and Bernadette Baum