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Game Over: Footnote 513 Blocked by Latest CFTC Guidance
By Nik Venema | November 26, 2013

US Banks embattled with the CFTC’s Cross-Border Trade Rules which are eroding their overseas business, lost out again recently on a loophole which up until November 13 allowed them to initiate trades in the US, and complete them internationally to bypass SEF’s. Footnote 513 was blocked by new guidance released by the commission which continues to latch down on those traders defying the rules meant to protect Americans from the risk accumulated by foreign OTC derivative transactions.

Those US banks which have been trading billions in contracts outside of SEF’s defended themselves by arguing they had misinterpreted the rules due to their obscurity. Four sentences were “misread” within the original guidance released in July. The footnote explains that foreign “branches” of US institutions would fall under the rule, but failed to speak on “affiliates” which could be considered private entities separate from the umbrella of the company.

It’s a point scored for the CFTC and Gary Gensler’s in his mission to stomp out any risk to the US market, as overseas affiliates now fall under the latest guidance. This of course spotlights the ongoing controversy surrounding the cross-border trading fiasco and demonstrates the utter desperation of institutions, who no doubt took advantage of a gap they viewed as a clause, to find some relief from the losses they are expected to endure within their European and Asian business. Even for those brokers dealing overseas who are following the rules, the long wait for SEF registration for their jurisdictions means they could face up to another year of roadblocks. With nowhere to run, these traders are officially stuck between a rock and a hard place.