Gary Cameron/ReutersGary Gensler, chairman of the Commodity Futures Trading Commission, is a fierce critic of Wall Street risk-taking.Federal regulators reached a last-minute compromise on Friday to expand their oversight far beyond American shores, overcoming internal squabbles and Wall Street lobbying to rein in some of the overseas trading that imploded during the financial crisis.
The Commodity Futures Trading Commission voted 3 to 1 to adopt its so-called cross-border guidance, a deal struck just hours before a self-imposed deadline was set to expire. Gary Gensler, the agency’s chairman and a fierce critic of Wall Street risk-taking, spearheaded the decision to approve the guidance, which dictates how to apply United States regulations to American banks doing business in London and beyond.
Yet the agency’s battle, both internally and with Wall Street, will drag on for months.
While firms like Goldman Sachs International and the London branch of Citigroup will face a wave of new scrutiny, the agency made crucial concessions to big banks, including a delay in the new oversight.
The oversight, Mr. Gensler said, will be phased in over several months and his agency will defer to European regulators if they adopt similar rules.
The agency also afforded Wall Street additional time to comment on the plan to phase in the regulation, inviting an onslaught of lobbying from banks that could seek additional delays. One financial group, the Institute of International Bankers, called the agency’s announcements “a big step forward” to a “workable approach.”
Dennis M. Kelleher, president and chief executive of Better Markets, a nonprofit advocacy group, called it, “the lobbyist full employment act.”
While he praised Mr. Gensler for securing a deal, he added that “this mixed bag of some very good, some not-so-good and some to-be-determined provisions will mean that Wall Street’s war on regulation of high-risk cross-border derivatives dealing will not end today.”
This delay could be costly. Mr. Gensler, a former Goldman Sachs executive who has been an aggressive regulator, is expected to leave the agency before the end of the year. His departure could leave certain aspects of the cross-border plan in the hands of someone with a softer stance toward the banks.
Even with the compromise, however, the guidance is a victory for Mr. Gensler, who had vowed to meet the Friday deadline without fully caving in to Wall Street’s demands. The 2008 crisis, he noted, demonstrated the huge risks of overseas trading to financial stability.
“At the center of this crisis were the far-flung operations of U.S. financial institutions,” he said in an interview. “What we did is kept those lessons in mind and kept our eye on protecting the American public.”
Trades by a London unit of the insurance giant American International Group, he noted, nearly toppled the company. And JPMorgan Chase’s $6 billion trading loss in London last year reignited concerns that risk-taking could come crashing back to American shores.
The crisis led Congress to enact the Dodd-Frank Act in 2010, a law that mandated an overhaul of the $700 trillion marketplace for derivatives, financial contracts that derive their value from an underlying asset like a bond or an interest rate. Under that law, the trading commission is supposed to extend new derivatives changes overseas — including tougher capital standards, a requirement that trades go through regulated clearinghouses and other requirements — if the foreign trading has “a direct and significant connection with activities” of the United States.
Over the last year, the agency has battled infighting over how aggressively to interpret the law, and when to do it.
The guidance, the most contentious issue facing the agency, had strong support from Mr. Gensler and Bart Chilton, a fellow Democratic commissioner at the agency who also supported completing the guidance by the Friday deadline. Mr. Chilton noted that, with the deadline coming three years after Dodd-Frank was passed, “It didn’t just sneak up on us.”
But Mark P. Wetjen, a Democratic commissioner with an independent streak, had expressed concern that the Friday deadline was “arbitrary.”
With the agency’s Republican commissioner, Scott D. O’Malia, opposing the guidance, Mr. Wetjen held the swing vote.
A compromise appeared unlikely until Wednesday, people close to the agency said, when Mr. Wetjen and Mr. Gensler reached a tentative deal.
A central component of Mr. Gensler’s final plan will apply the Dodd-Frank rules to overseas firms that are guaranteed by an American bank, including Goldman Sachs International. Foreign branches like the British branch of JPMorgan Chase, where the recent losses occurred, will also face the agency’s oversight.
Mr. Gensler also included offshore hedge funds, many based in the Cayman Islands, so long as their “nerve center” is based in the United States.
But Mr. Gensler’s victory came with some sacrifice. He agreed, for example, to defer to foreign regulators in Europe and elsewhere that have adopted “comparable and comprehensive” regulations to Dodd-Frank. It is up to Mr. Gensler’s agency to decide whether the other regulators’ rules meet the standard.
While European regulators have adopted many similar rules, authorities in Hong Kong, Switzerland and elsewhere have fallen far behind. Unless those regulators catch up by December, Dodd-Frank will apply to American banks doing business in those regions.
In a concession to Mr. Wetjen, Mr. Gensler agreed to delay the requirements, so the start date for most banks for the new rules would be Dec. 21. By soliciting additional comments from Wall Street, the agency also signaled that it was open to a longer delay.
The compromise traces to a plan that Mr. Chilton floated in June. While he noted that foreign regulators could use the additional time to catch up, he also argued that the agency should not delay indefinitely.
“Like in the movie ‘Field of Dreams,’ when the voice from the corn field says, ‘If you build it, he will come,’ ” Mr. Chilton said on Friday. “I’ve said repeatedly that if we and the E.U. build balanced and fairly harmonized financial regulatory regimes, the rest of the world will come.”