By Aruna Viswanatha
WASHINGTON (Reuters) - A top lawmaker urged regulators to tighten the rules for swaps trading at foreign offices of U.S. banks, stepping into a simmering global conflict over how to supervise the $650 trillion derivatives market.
Senator Carl Levin, a Michigan Democrat, urged the Commodity Futures Trading Commission (CFTC) to disregard criticism from overseas and from U.S. lawmakers who have chided the derivatives watchdog for what they say is an aggressive stance.
"American families and businesses deserve strong protections against the risks posed by derivatives trading, including from cross-border swaps," Levin, who chairs the Permanent Subcommittee on Investigations, said in a letter.
The Dodd Frank overhaul of Wall Street gives the CFTC the powers to regulate derivatives trading overseas as long as it has a "direct and significant" effect on U.S. business, but there is debate about how to interpret the phrase.
In December, the CFTC gave foreign banks more time to meet its new rules for derivatives trading, as it finalizes regulation that would subject banks abroad to tough requirements if they want to trade with U.S. banks.
Under the CFTC's rules, foreign banks would have to register with the agency as a "swap dealer" and comply with the same rules as American banks if their annual swaps trading volume with U.S. banks exceeds $8 billion.
But the European Union, Britain and Japan have all urged the CFTC to rely more on foreign regulators, who are all working on similar rules after global leaders in 2009 agreed to clamp down on the financial sector.
They say that imposing foreign rules abroad could subject banks to rule sets that contradict each other. But the talks between regulators are in stalemate.
Mark Carney, who heads the Financial Stability Board grouping of global regulators, said at a Reuters event last week that he would try to solve the issue in bilateral talks, something that would require "some leadership."
Separately, the CFTC said on Wednesday that Office of International Affairs Director Jackie Mesa, who works closest with Chairman Gary Gensler on the international negotiations for the new swaps rules, was leaving the agency.
Levin urged the CFTC to stick to its guns, saying JPMorgan Chase's $6.2 billion losses in a London unit was a prime example of why America could not rely too much on foreign regulators when overseeing banks.
His committee in March issued a lengthy report faulting the London unit - and a trader nick-named the London Whale because of the huge positions he took - for ignoring risks.
"Exempting derivatives trades conducted by the foreign offices of U.S. financial institutions from U.S. derivatives safeguards would ignore the lessons taught by JPMorgan's high risk whale trades," the letter said.
Those trades "illustrate the type of swaps trading activity by a large federally insured bank and its foreign office that must not be exempt from comprehensive U.S. derivatives regulation and oversight," Levin said.
In addition to urging regulatory reform, Levin told Bloomberg Television earlier this month his committee would refer its findings on the Whale to the Justice Department and the Securities and Exchange Commission.
A Senate staffer, who declined to be identified, said on Wednesday the committee has already referred the matter to enforcement agencies.
(Editing by Douwe Miedema and Chris Reese)