REUTERS SUMMIT-US CFTC launches inquiry into evasion of swaps rules

(For other news from Reuters Financial Regulation Summit, click on http://www.reuters.com/summit/FinancialRegulation14)

By Douwe Miedema

WASHINGTON, April 28 (Reuters) - The U.S. swaps regulator plans to research whether U.S. banks' overseas trading activity is complying with its rules, a senior official said on Monday, as Wall Street adapts to new rules for the $690 trillion global market.

Scott O'Malia, a Republican member of the Commodity Futures Trading Commision, said he had asked the agency's staff for a legal opinion on whether U.S. banks were possibly evading its rules when doing business in Europe.

"I've asked for a memo or legal guidance from the chairman's staff ... about how people are organizing, and how they are executing trades in Europe," O'Malia said at the Reuters Financial Regulation Summit. "There's just a lot of questions."

O'Malia said the staff agreed to research the issue. It's not clear if the inquiry will lead to any enforcement actions, or further policy changes.

Swaps in the United States must be traded on regulated platforms from the beginning of this year, and U.S. banks need to comply if they do business abroad from an affiliate that is guaranteed by the parent company.

But this means higher costs for clients in Europe - which is lagging behind in its swap trading rules - and many have shifted away their business to subsidiaries of U.S. banks that are not guaranteed, or to non-U.S. banks.

Swaps are used for a broad range of purposes, including to hedge future interest rate expenses and other costs.

"Do people want to trade in Europe to execute without the (rules)? I think the answer at this point is 'yes'. And how will that play out?" O'Malia said at the summit.

Agency staff may request information from banks on the issue as its inquiry proceeds, he added.

Before the crisis, swaps used to be traded largely over the phone in bilateral agreements between buyers and sellers, but the 2010 Dodd-Frank law put an end to that, to make the market less opaque and more resilient to financial shocks.

Much of what the legal opinion will focus on is what constitutes a "guaranteed affiliate", and whether a bank can carve out individual trades even if it is conducting the business from such a unit with such a backstop.

"Do we view it by entity or by transaction ... There are a number of people that have raised both options as this is how we trade," O'Malia said. "This is an area that probably needs a lot closer investigation and oversight," he said.

Three Wall Street trade groups have sued the CFTC (Taiwan OTC: 1586.TWO - news) over a document laying out how its rules apply when U.S. banks are doing business abroad, or with European and other foreign clients from their U.S. offices.

The document was issued as "guidance" by agency staff, and not as a formal rule, which requires a vote from the commissioners. In the lawsuit, the groups accused the CFTC of illegally avoiding a rigorous rulemaking process and failing to study economic impacts of the regulation and its costs to industry.

O'Malia in the past has also accused his agency of dodging proper procedures, and has argued the guidance lacks teeth.

"If it doesn't comply with our guidance, what are you going to do about it? ... guidance is not enforceable," O'Malia said on Monday.

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(For more summit stories, see ) (Reporting by Douwe Miedema; Editing by Karey Van Hall and Sandra Maler)