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By Douwe Miedema and John O'Donnell
WASHINGTON/BRUSSELS, July 11 (Reuters) - The European Unionagreed with U.S. regulators Thursday on how to jointly superviseforeign derivatives traders operating in their territories,solving a months-long trans-Atlantic rift.
The two sides said they would rely more on each other'srules - drawn up to make banking safer after the 2007-09 creditmeltdown - and will allow banks some flexibility to get out fromunder the most cumbersome new oversight.
"Our discussions have been long and sometimes difficult, butthey have always been close, continuous and collaborative talksbetween partners and friends," said Michel Barnier, the EuropeanCommissioner in charge of regulation.
The U.S. derivatives regulator, the Commodity FuturesTrading Commission (CFTC), and the EU's executive, the EuropeanCommission, announced a "path forward" on a package of measuresthat laid out how to apply the rules across borders.
The two sides are writing a raft of new rules to make the$630 trillion derivatives market safer, and prevent a repeat ofthe costly bank bailouts after the crisis.
The fine print of a deal is hugely important for Wall Streetbanks such as Citigroup, Bank of America and JPMorgan, who dominate the lucrative market.
"What the banks want more than anything else is just tounderstand what rules apply when," said Joel Telpner, a NewYork-based partner at law firm Jones Day.
"Even if they don't like where this is coming out, they'regoing to benefit significantly from the clarity."
Gary Gensler, chairman of the CFTC, had long insisted thatforeign companies should comply with the agency's rules if theytrade risky derivatives with U.S. firms.
Barnier, bank lobbyists and a growing chorus of U.S.politicians have chided the former Goldman Sachs bankerover his intransigence, urging him to rely more on foreignregulators who are drawing up similar rules.
Reuters first reported that Gensler was within reach of anagreement with Barnier, which would give Gensler a bargainingchip to push a deal through the CFTC, which itself has beendivided over the issue.
IRONING OUT WRINKLES
The CFTC is set to vote on its so-called cross-borderguidance on Friday, the last day it can do so because a broadtemporary relief for foreign companies expires. Having no rulein place would cause regulatory confusion.
It had long been unclear whether Gensler would be able toround up the required three votes for the plan, with fellowDemocrat commissioner Mark Wetjen urging for more reliance onthe rules written by foreign regulators.
But the two were now within reach of a compromise, a sourceclose to the negotiations said on Wednesday, which would securea key swing vote for the plan.
Barnier is scheduled to visit Washington next week, and thedeal with Gensler will help address a bone of contention ininternational trade between Europe and America as they embark ontalks towards a landmark free trade agreement.
The deal comprises a host of detailed new regulations forbuyers and sellers of swaps, laying out how to register theirbusiness, what rules there are for trading, what data they mustreport, and how to reduce risk.
The swaps market enables clients to exchange virtually anytype of financial risk, and has mushroomed into a hugeplayground for speculators out of sight from regulators frommodest beginnings in the mid-1980s.
Banks had been complaining that they would be subject todifferent and sometimes conflicting sets of rules, and thatclients would do business with banks in their own region only,fragmenting global financial markets.
Under the terms of the deal, a New York bank will haveleeway to use a European exchange to buy and sell derivatives aslong as these are registered in the United States, which most ofthese trading venues have long been.
The CFTC also promised to give more time to market partieswanting to trade on a European swaps exchange, in case Europehad not finished its own rules by the time the U.S. laws forthese platforms kick in next year.
Clearing houses - traffic control centres that stand betweenbuyers and sellers of swaps to reduce risk - could continuetheir work with foreign clients even if they weren't registeredin one of the two jurisdictions.
Market parties will also be allowed to choose between EU orU.S. rules that determine risk mitigation for non-standardizedswaps that do not go through clearing houses.
One lawyer at a large bank said that the agreement soothedfears that a lack of regulatory clarity could impact tradingactivity abroad as clients were unsure which rules applied towhich types of trade.
The CFTC also said it would close a loophole that hadallowed hedge funds to avoid most of its rules because theirfunds are incorporated in the Cayman Islands, which means theyare not U.S. persons by law.
