Rep.Grimm: Very Concerned About Firms Moving Overseas Because of Regulatory Arbitrage


Both the Commodity Futures Trading Commission and the Securities and Exchange Commission are suppose to have in place rules to govern the swaps market by July 16th.

We have been hearing for months about the challenges of this looming deadline, especially since so many of the regulations are still not written and the market participants dont' know which laws that are written are going into effect.

In an effort to give legal certainty to swap market participants, CFTC members are meeting Tuesday to vote on a broad exemption to the new law. With all this up in the air, one member of Congress, Rep. Michael Grimm (R-NY), is set to introduce legislation early this week that will give the markets time to prepare and adapt to the new rules.

Rep. Grimm, member of the Financial Services Committee is not your typical Congressman. A U.S. Marine he served in the Persian Gulf War and after his service went into the FBI. There he became the first FBI Agent to successfully infiltrate Wall Street. He posed as a hedge fund manager during "Operation Wooden Nickel" taking down individuals in stock manipulation, currency scams to money laundering.

It has been considered one of the agency's most successful White Collar undercover investigations. I asked Rep. Grimm if he thinks his bill has a chance in passing and what are his greatest fears in this sea of regulation grey.

LL: This week you plan on introducing derivative legislation. What will your bill accomplish?

Rep. Grimm: As written, Dodd-Frank repeals current law and replaces is it with new rules to be set by regulators by July 16th. The problem is that that these rules are not yet written, and are not likely to be written by that date, so the swaps market could be left in legal limbo.

My bill would simply make the effective date of the implementation of the swaps and security based swaps trading rules under Title VII of Dodd-Frank consistent with other effective dates in the legislation: rule plus 60 days. Therefore, once the rule is promulgated by the regulators, the market will have 60 days to prepare and adapt to the new rule creating a more seamless segue from old to new regulations. Until then, the old rules will stay in place and legal uncertainty will be avoided.

LL: There have been other bills which would have delayed or amend Dodd-Frank and they failed. Why do you think your bill has a chance to pass?

Rep. Grimm: This bill has a much more narrow focus and only seeks to make the effective dates of the new rules consistent so that the regulators can finish their work without the pressure of such a strict deadline, allowing them to make quality rules that strengthen the markets and not add more uncertainty. This bill simplify codifies what is going to practically happen anyway, but doesn't delay anything.

Many rules in Dodd-Frank are rule plus 60 days effective dates already, so this makes the legislation more consistent in that regard.

LL: Regulators have said the laws will not be finalized by the July 16 deadline. You worked on Wall Street. What is your greatest fear?

Rep. Grimm: The greatest fear would be swaps participants would be frozen by the legal uncertainty and a $600 trillion market could lock up. This could create chaos and even more uncertainty in the markets, which is the very last thing we need.

LL: What's the biggest unintended consequence in this murky grey area?

Rep. Grimm: The greatest unintended consequence is the possibility of civil litigation in the swaps market as well as a loss of business for US firms due to regulatory arbitrage. If Title VII goes into effect on July 16 it will require swaps and security based swaps to be traded on registered platforms.

There's one problem: There are no rules on how to register and what is needed to register. Therefore, a party who enters into a swap and winds up on the losing end could potentially argue that since this swap was not run through a registered platform, it is not enforceable. This could lead to a great deal of civil litigation. Additionally, US business can be shifted to non-US institutions that are not bound by Dodd-Frank, resulting in US financial firms losing market share to its global competitors.

LL: CFTC will be reviewing the law to see what parts need further clarification. Are you confident the CFTC can get this done?

Rep. Grimm: While both CFTC and the SEC are aware of the issue and have made it clear they will be issuing guidance before July 16, I am not convinced their actions would remedy the possible civil litigation issue I just spoke about. Moreover, if they are in fact able to rectify this potential problem then this legislation will have no harmful effect and at a time that uncertainty is at an all time high in the market place, I'd rather be safe then sorry.

LL: CFTC Commissioner Bart Chilton who I interviewed last week is in Europe talking about "Cheetah Traders" and the need to make sure regulations in the US and Europe are equivalent in terms of protection. What is your view on the global implementation of derivatives trading? Is Europe more lax? Are you afraid of companies moving overseas?

Rep. Grimm: I am very concerned about firms moving overseas. You must keep in mind that Europe is not the only area we need to be concerned with. Asia has been making it abundantly clear that they do not see themselves going down the same road as us, and possibly Europe, in regards to regulations.

If we get this wrong, business and jobs will go overseas and will never return. Regulatory arbitrage is a very real concern that we must be cognizant of and that is why I prefer the regulators to take the time they need to fully digest the industry feedback before rushing to make rules at a pace they have never done before.

LL: CFTC Commissioner Bart Chilton echos your concerns about regulatory arbitrage and lax regulation.

Rep. Grimm: I am very concerned about regulatory arbitrage. It ties in with the previous issue that we just discussed, regarding uncertainty and a lack of harmony in various jurisdictions. Again, regulatory arbitrage could lead to business going overseas and leaving the US at a major competitive disadvantage.

A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."


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