Foreigners Feel Overseas Regulation on U.S. Investments is Overstepping Boundaries

“WASHINGTON—U.S. regulators soon may extend their reach overseas and impose restrictions on foreign governments engaging in some financial transactions in the U.S.

Foreign central banks, sovereign-wealth funds and international organizations like the World Bank could be subject to U.S. rules intended to reduce risk in the financial system. As part of last year’s financial-regulatory overhaul, regulators gained power to scrutinize and regulate market participants engaging in swap transactions, including those backed by foreign governments.

Swaps are a type of derivative used to hedge risk and essentially are agreements between two parties for payments pegged to the performance of stocks, bonds, commodities or indexes. The proposed regulations would require foreign entities to conduct swaps trades on an exchange, potentially post margin and hold enough capital to absorb losses if the trade goes sour.

The prospect of such requirements is triggering a backlash from government-backed foreign institutions, including the European Central Bank, Bank of France and China’s sovereign-wealth fund, China Investment Corp. They argue the U.S. is overstepping its authority and should exclude them from oversight.

“It would be inappropriate to be subject to supervisory requirements by a non-EU authority,” the ECB wrote in a May 6 letter to regulators that was reviewed by The Wall Street Journal. “We are concerned that external control of our activities might not be sufficiently sensitive to the practice of managing foreign reserves and could thus frustrate the ECB’s performance of the mandate that it has been given.” A spokeswoman for the ECB declined to comment.

The Commodity Futures Trading Commission and Securities and Exchange Commission, which are writing the swaps rules, are grappling with the issue and have reached out to the Federal Reserve for guidance, according to government officials. Regulators could exclude some entities depending on how well-regulated and well-capitalized the entities are, these officials said, but added no decisions have been made.”

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