In the long war over Wall Street regulation, a little-noticed clash erupted this week over a plan to rein in risky trading overseas.
Signs that a clash was brewing behind the scenes came after the Commodity Futures Trading Commission abruptly canceled a meeting to vote on the overseas trading proposal with just hours to spare. The agency provided no explanation, sending out only a short e-mail that it would “no longer hold a scheduled meeting on June 21, 2012.”
Interviews with regulators, who spoke on the condition of anonymity, show that the agency canceled the meeting after closed-door talks yielded a more flexible proposal that gives Wall Street additional time to comply. Now, rather than debating the issue in public, the commissioners plan to cast their votes in private over the next several days, according to people briefed on the matter.
While such wrangling is business as usual in Washington, and the changes debated this week are relatively modest, the trading commission’s new overseas proposal has become a focal point in the debate over Wall Street regulation. The proposal, stemming from the Dodd-Frank financial regulatory law, takes aim at firms that ship derivatives trading overseas to escape the eyes of American regulators. Roughly four years ago, foreign derivatives trading by American International Group in London nearly brought American firms to their knees.
Gary Gensler, the chairman of the C.F.T.C., has trumpeted such regulation for weeks, pointing to JP Morgan Chase’s recent multibillion-dollar trading loss that took place at a London-based unit.
“Recent events at JPMorgan Chase are a stark reminder of how swaps traded overseas can quickly reverberate with losses coming back into the United States,” Mr. Gensler said in a recent speech to bankers. “The risk can come crashing back here pretty quickly.”
The behind-the-scenes negotiations on this front echo battles over rules passed in the run-up to the financial crisis, when Wall Street won major concessions from regulators. The Securities and Exchange Commission, for example, in 2004 loosened an obscure provision that allowed banks to ratchet up their risk-taking.
The events this week also highlight the challenge facing independent regulators with five-member commissions. The agencies are tasked with writing hundreds of new rules under Dodd-Frank to police Wall Street. At the trading commission, every time a rule comes to vote, Mr. Gensler must secure the blessing of at least two colleagues.
“At the end of the day, democracy is a messy process,” said Dennis Kelleher, president of Better Markets, which supports tougher regulation of banks. “You get less-than-perfect outcomes from independent agencies.”
The trading commission’s roster features two Republicans, two Democrats and Mr. Gensler, a Democratic presidential appointee. Mr. Gensler’s push to rein in Wall Street has met some opposition from the Republican commissioners, who argue that the agency occasionally oversteps its bounds. And while he has loyal support from Bart Chilton, one of the agency’s Democratic commissioners, he has found the deciding third vote somewhat elusive.
“The five-member commission structure means that we have to find consensus, and I think our rules and the American public benefit from reaching a consensus,” Mr. Gensler said on Friday. Others note that about 90 percent of the agency’s votes received support from at least one Republican.
Mark Wetjen is the third Democratic vote. A former aide to Senate Majority Leader Harry Reid, he is the newest member of the agency. In his first several months, Mr. Wetjen has voted with Mr. Gensler on every proposal. But behind the scenes, people close to the agency say, he has emerged as a more independent voice.
In the case of the overseas proposal, Mr. Wetjen sought several significant changes last week. Mr. Gensler, who adopted some tweaks and rejected others, thought they had a deal.
But Mr. Wetjen raised additional concerns a day before the scheduled vote. While he never threatened to vote against the rule, neither did he promise to vote for it.
Mr. Gensler briefly considered proceeding, even without assurances, to force Mr. Wetjen’s hand. The chairman still had support from Mr. Chilton, who supported the earlier plan.
“I think there are times on some of these key issues, like the cross-border issue, that we need to be very strong even if a vote doesn’t go our way,” Mr. Chilton said on Friday. “Compromise is one thing; tossing out your beliefs is another.”
The plan would apply new derivatives rules not only to banks in the United States, but also to American banks that have foreign units. The proposal would also apply to foreign banks that conduct significant derivatives trading in the United States.
Mr. Wetjen, concerned that some American banks would face a competitive disadvantage, pushed for more flexibility. He urged Mr. Gensler to give American banks more time to comply, suggesting that the rules not fully take effect until nine months after the proposal was completed, according to a person briefed on the matter.
Proponents of regulation argue that Wall Street has had plenty of time to comply.
“How long do taxpayers have to wait to be protected from the risky activities of these too-big-to-fail banks?” Mr. Kelleher asked.
Ultimately, Mr. Gensler proposed a compromise, putting the proposal back on track. A deal was struck that provided the foreign arms of American banks with a reprieve so that they need not comply with certain provisions for 12 months after the plan is first proposed.
Mr. Wetjen also persuaded Mr. Gensler to give banks based solely in the United States until Dec. 31, roughly a three-month reprieve, to comply with other provisions. In another compromise, the agency is now planning to allow branches of American banks based overseas to apply for so-called substituted compliance, in which the banks will face similar rules from foreign regulators rather than from the C.F.T.C. Some regulators say that the substituted plan would level the playing field and discourage regulatory arbitrage.
Mr. Wetjen declined to comment.
The changes were surprising to some outsiders. People traveling to the meeting learned it was canceled only after arriving in Washington.
Some supporters of the effort questioned the changes, given the recent losses at JPMorgan.
“It’s unbelievable to me that this would be a problem in this day and age, especially because of the JPMorgan loss,” said Michael Greenberger, a professor at the University of Maryland law school and a former regulator at the trading commission.