Letter on derivatives: stop the offshore race to the bottom

Wall Street banks trade perhaps half of their derivatives activities through foreign banks. For them, foreign jurisdictions are an obvious escape route from U.S. financial regulations. Last June, Marcus Stanley of Americans for Financial Reform wrote:

On Monday, the U.S. became the first country in the world to require mandatory clearing of many derivatives contracts, a crucial protection in these previously unregulated markets.

But even as this crucial protection takes effect, Wall Street is mobilizing to create a back door escape route. Its goal is to prevent U.S. regulation of derivatives transactions by U.S. companies that are conducted overseas. This loophole could strike at the foundations of financial reform.
. . .
It would create an incentive for global banks to transact their business through whatever jurisdiction has the weakest regulations – a “regulatory haven” to match the tax havens that international corporations already use.

A month later, TJN joined AFR in co-signing a letter to the European Commission and a number of finance ministers, urging them not to adopt proposals that would foster exactly this race to the bottom, by allowing ‘substituted compliance’ (i.e. in countries that get a clean bill of health from the U.S., financial institutions can escape direct U.S. regulation, and quite possibly any meaningful regulation.) The issue is analogous to what happens in tax, when companies fret about so-called ‘double taxation’ – but end up, through the offshore system, finding pathways through the system, to enjoy double non-taxation.

Today, AFR has written an important new letter, containing this:

“The CFTC did not take this advice, and has instead laid out a cross-border regulatory framework in which substituted compliance is available for derivatives transactions between foreign subsidiaries of U.S. entities. Transactions between guaranteed foreign subsidiaries of U.S. entities and foreign entities not tied to a U.S. parent are completely exempted from Dodd-Frank (unless such foreign entities are registered swap dealers). Finally, transactions involving foreign subsidiaries of U.S. entities that are not explicitly guaranteed by the parent are also broadly exempted from Dodd-Frank in cases where such subsidiaries are neither conduits nor swap dealers.”

And it adds:

“A danger in this approach is the possibility that major U.S. financial firms will be able to move most of their derivatives transactions into nominally overseas subsidiaries, giving them a choice between substituted compliance regimes or in some cases permitting them to avoid oversight altogether.”

These arcane moves constitute grave dangers for the global economy. The letter responds to a request for comment on a Staff Advisory issued last November, and adds:

“If the CFTC alters its November staff advisory to permit such an outcome, then major U.S. and global banks conducting transactions on the U.S. market will effectively have their choice of rules under which to operate.
. . .
We thus urge the CFTC to avoid any weakening of the November staff advisory”

We support that, as an absolute minimum.


Related Posts

The Offshore Wrapper: the Panama Papers, one year on

Photos from the Protest outside PwC 1 Embankment Place, part of the Global week of action for tax justiceWelcome to the Offshore Wrapper – your weekly update from TJN.  Happy Paniversary! This week it’s been one year since the Panama Papers were leaked, and a number of organisations around the world have been marking the occasion though the global week of action for tax justice. In London, activists from the TJN and the […]

READ MORE →

Protesting PwC: Professionals Without Conscience

Photos from the Protest outside PwC 1 Embankment Place, part of the Global week of action for tax justiceThis week is the global week of action for tax justice and on Wednesday 5th April activists from the Tax Justice Network and Methodists for Tax Justice held a protest outside the London offices of Price Waterhouse Coopers. The global week of action for tax justice is happening one year after the release of the […]

READ MORE →

Germany moves forward on corporate transparency

ReichstagThe Bundesrat has today voted to recommend implementing a public register of the beneficial ownership of companies and trusts.  Great news from Germany, as the country takes an important step forward towards corporate transparency.

READ MORE →

New estimates reveal the extent of tax avoidance by multinationals

Price Waterhouse CoopersNew figures published today by the Tax Justice Network provide a country-level breakdown of the estimated tax losses to profit shifting by multinational companies. Applying a methodology developed by researchers at the International Monetary Fund to an improved dataset, the results indicate global losses of around $500 billion a year. The figures appear in a […]

READ MORE →

Banking Secrecy in China, its related territories and Taiwan

Hong Kong from Sky 100Foreword. The Tax Justice Network is a non partisan network of experts working towards transparency, so we do not take any position about countries’ territorial and political claims. However, we do expect countries with a de jure (legal) or de facto (in practice) influence over other territories, to take responsibility for their power. We point […]

READ MORE →

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to Top