A policy allowing a U.S. agency to regulate derivatives trading overseas to help reduce risks to the global financial system will be delayed under a vote Friday.
The Commodity Futures Trading Commission voted 3-1 to stagger the effective dates for the policy. The delay marks a middle ground between Chairman Gary Gensler, who wanted to extend the CFTC's regulation to overseas markets now, and Wall Street banks, which opposed extending its reach.
The Obama administration favored a delay to allow foreign regulators to finalize their own rules for derivatives oversight.
A derivative is an investment that's based on the value of an underlying asset, such as oil or corn or dollars. Bad bets on risky derivatives, and lax regulation of them, were a leading cause of the 2008 financial crisis.
The CFTC policy applies new rules governing the $700 trillion derivatives market to U.S. banks' foreign affiliates that trade derivatives and to U.S. trading operations of foreign banks.
The agency's new oversight rules were mandated by the 2010 financial overhaul law. One requires banks that trade derivatives to put up money to cover potential losses. Another would require most derivatives to be traded in clearinghouses to make prices more transparent.
Under Friday's vote, the new rules would be phased in overseas starting in September. The CFTC commissioners also agreed to have European regulators monitor derivatives trading in their countries if their oversight rules closely resemble the CFTC's. By March, European banks with trading operations in the United States will have to meet the requirements.
On Thursday, the CFTC and the European Commission announced an agreement to coordinate their derivatives rules.
"What happens in one nation impacts another," Commissioner Bart Chilton said before the vote. "Risk travels around the globe with a click of the mouse."
Proponents of the wider reach for the CFTC say that regulations overseas tend to be weaker and that stricter supervision is needed to reduce the risk to the broader financial system. Banks and other opponents counter that the CFTC's rules will make it harder for U.S. firms to remain competitive in some foreign markets.
Friday was the deadline for the agency to act under the financial overhaul law, which authorized the CFTC to define which overseas derivatives transactions should be subject to oversight.
The CFTC proposed the policy last year, a few weeks after JPMorgan Chase, the biggest U.S. bank, announced that it had lost billions because of high-risk derivatives trades at its London office.
Scott O'Malia, the lone Republican commissioner on the CFTC, dissented in Friday's vote.
The CFTC "is not the global regulatory authority that it may think it is," O'Malia argued.
Derivatives often are used to protect producers or users of commodities against future price fluctuations of an underlying commodity or security. But they also are used by financial firms to make speculative bets, and they have grown increasingly complex and risky.
Gensler and other advocates of the "cross-border" reach have pointed to the $182 billion federal bailout of American International Group Inc. at the height of the financial crisis — the largest for any company. AIG nearly collapsed because of its huge derivatives bets on the housing market. AIG has since repaid the bailout.
JPMorgan's trading loss from the London unit was eventually estimated at more than $6 billion. The bank drew sanctions from U.S. regulators for lapses in its oversight of the London unit.
Five of the biggest U.S. banks — JPMorgan, Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley — account for more than 90 percent of derivatives contracts. Regulators estimate that nearly half of derivatives are traded outside the United States.
The big banks have lobbied against stricter regulation for derivatives, which are a significant source of the banks' revenue.
In contrast to the CFTC, the Securities and Exchange Commission has taken a looser approach for the smaller proportion of derivatives it regulates. The SEC would allow overseas trades to avoid U.S. regulation if the country in which they occur has rules roughly equivalent to those in the United States.