Deadline on Trading Rules Abroad Splits an Agency

Wall Street lobbyists, seeking to delay a July 12 deadline for rules that would rein in lucrative trading by banks overseas, pressed their case before a top Washington regulator last week.

The regulator, Gary Gensler, the chairman of the Commodity Futures Trading Commission, had an unusual response. He summoned into his office a pregnant employee whose due date happened to be July 12.

“Tell everyone about that day,” Mr. Gensler instructed the employee, according to people who attended the meeting.

Pointing to her abdomen, she grinned and replied, “No delay.”

While the message to bankers was clear, some of Mr. Gensler’s colleagues are still fighting his plan to extend the agency’s reach beyond American borders, an issue that took shape in the 2008 financial crisis.

Mark Wetjen, a Democratic commissioner with an independent streak, recently called the deadline “arbitrary.” And with the agency’s Republicans pushing for a delay, Mr. Wetjen holds the swing vote.

The dispute underscores a larger tension gripping the trading commission. As the deadline nears, the plan to regulate trading by American banks in London and beyond has set off a rare breakdown of decorum at an agency long known for its cordial style and unanimous votes.

Mr. Wetjen, for example, irked some colleagues last week when, without warning them, he delivered a speech to bankers in London that called for a new “interim” plan, according to an e-mail reviewed by The New York Times.

And when Mr. Gensler refused to budge on the July 12 deadline — he informed co-workers that he was departing for vacation a day later, and would have limited access to e-mail — one Republican commissioner, Jill Sommers, declared, “no one has ever accused Gary Gensler of being reasonable.”

Even in a town known for its partisan outbursts and vitriolic finger-pointing, the tension at the agency was striking to political insiders. “It’s like the seventh grade but without the lollipops,” said a Congressional aide.

Some officials, who spoke on the condition that they not be named to freely discuss private talks, said they were still optimistic a deal would be struck next week. Until then, commissioners are planning to negotiate through the holiday weekend.

The time pressure reflects the importance of the cross-border plan. During the financial crisis, trades by the American International Group in London nearly brought the insurance giant and its Wall Street clients to their knees. JPMorgan Chase’s $6 billion trading loss at a London unit last year further highlighted how risk-taking can come crashing back to American shores.

The blowups spurred a federal crackdown on the $700 trillion marketplace for financial contracts known as derivatives — contracts that derive their value from an underlying asset like a bond or an interest rate.

Even today, banks continue to book much of their derivatives trading overseas. Wall Street’s biggest banks, regulators say, have more than 2,000 legal entities spread internationally.

“Without effective cross-border oversight, there is no derivatives reform,” said Marcus Stanley, the policy director of Americans for Financial Reform, which supports the new rules. “It’s like barring the front door and leaving the back door open.” Dennis Kelleher, who runs Better Markets, called it a “defining” moment for the agency.

The agency’s cross-border guidance stems from the Dodd-Frank Act. Under that 2010 law, the trading commission is supposed to extend new derivatives reforms — including tougher capital standards — if overseas trading has “a direct and significant connection with activities” of the United States.

The agency is now drafting guidelines for how the law applies to everyday trading, mindful that certain requirements could drive trading business away from United States banks. Under the plan, it is likely that firms like Goldman Sachs International and Citigroup’s London branch will face the new scrutiny, though Mr. Gensler’s agency will ultimately defer to European regulators if they adopt rules similar to Dodd-Frank.

The agency also softened an earlier draft of its guidelines. In recent weeks, officials briefed on the negotiations said, Mr. Gensler has offered to narrow the definition of what sort of firm is considered a “U.S. person” that would be covered under the regulation while expanding an exemption for smaller banks overseas. In another concession, the officials said, the agency plans to exempt certain entities of giant foreign banks so long as each entity does not trade in more than $8 billion in derivatives a year.

Mr. Gensler also circulated a plan to commissioners this week that would phase in the cross-border requirements over time.

Some lawmakers are urging the agency to tighten its rules. On Wednesday, a group of Democratic senators, including Carl Levin of Michigan and Jeff Merkley of Oregon, are expected to raise concerns about loopholes.

Wall Street, in contrast, is bracing for July 12, when an order exempting overseas trading from federal scrutiny expires. If the agency fails to produce new guidelines but declines to extend the deadline, some banks fear widespread confusion will ensue.

“We find it very problematic that, this close to a critical date, there is complete uncertainty as to how the agency will proceed,” said Annette L. Nazareth, a partner at the law firm Davis Polk.

History would suggest that a deal will materialize. Of 56 Dodd-Frank rules approved at the agency, two-thirds won support from all five commissioners.

But this deal is different. For one, it is likely to be the last policy to come from the current configuration of the trading commission. Ms. Sommers recently said her last day would be Monday. And Mr. Gensler, whose term expires in December, has turned down the White House’s offer to return to the agency.

With time running low, Mr. Gensler has refused to extend the July 12 deadline. By his reckoning, the deadline comes three years after the passage of Dodd-Frank and a year after a draft version of the guidance.

“Congress and President Obama asked us to do this thing three years ago,” said Bart Chilton, a Democratic commissioner at the agency who supports Mr. Gensler’s effort. “Come on already.”

Mr. Wetjen, the newest member of the agency, has been a harder sell. He has not ruled out meeting the July 12 deadline, but has publicly raised concerns about rushing and has yet to produce for Mr. Gensler a comprehensive list of suggestions. “I don’t make any apologies for being deliberative and trying to sort out the best policy,” he said.

A spokesman for Mr. Gensler declined to comment.

While Mr. Wetjen has voted with Mr. Gensler on every proposal before the agency, unlike other commissioners, he has also softened some rules. In the cross-border plan, according to officials briefed on the matter, he urged Mr. Gensler to allow for overseas branches of banks like Citigroup to be overseen by foreign regulators with similar rules.

A former aide to Harry Reid, the Senate majority leader, Mr. Wetjen has challenged the notion that he is friendly to Wall Street. At a recent meeting with one such group, Mr. Wetjen began by jokingly saying, “I suppose you’re here to tell me that I’m blowing a hole in financial reform.”

His relationship with Mr. Gensler is more complicated. The two are friendly in person, and are said to respect one another.

But Mr. Gensler, some officials say, has expressed dismay with Mr. Wetjen when he proposes certain changes to a rule. And in a moment of frustration with Mr. Gensler’s aggressive bargaining style, one person said, Mr. Wetjen blurted to a colleague that he should tell Mr. Gensler where to go, using an expletive. (Mr. Wetjen said that he did not “recall saying that.”)

Their roles at the agency seem unlikely. Mr. Wetjen is a soft-spoken lawyer from Iowa; Mr. Gensler, a former Goldman Sachs banker whose job was to oversee derivatives trading.

In the meeting last week, Mr. Gensler emphasized his Wall Street ties. “Guys, I was one of you,” he said, according to a person at the meeting. “But you’re asking us to repeal Dodd-Frank. We’re not going to do this.”