“Gary Gensler, the reform-minded chairman of the Commodity Futures Trading Commission, got the best deal he could on Friday, when the commission voted 3 to 1 to approve guidance on how new rules on derivatives will apply internationally, as required under the Dodd-Frank financial reform law. But, in the face of unified opposition to strong “cross-border” regulation — from the big banks; their government allies in both the United States and Europe; and a swing-vote Democrat on the commission, Mark Wetjen — the deal falls short of what’s needed to protect American taxpayers and the global economy from the calamitous effects of reckless bank trades.

Under the guidance, banks and hedge funds with a principal place of business in the United States will have to adhere to the new Dodd-Frank derivatives rules. That’s a positive development because it ensures that entities run in, say, Greenwich, Conn., can’t dodge the rules by incorporating in, say, the Cayman Islands.

But the real issue is how to regulate derivatives trading by the overseas affiliates of American banks and by the foreign banks that do business with them. Mr. Gensler had correctly argued that those trades should fall under Dodd-Frank, unless foreign regulators adopted rules that were substantially the same as those under American law. But instead of the rule-by-rule similarity originally envisioned, the guidance allows for so-called substituted compliance with a foreign country’s rules as long as those rules are ‘comparable’ and ‘comprehensive.’ That’s a win for the banks for which the whole point of substituted compliance is to conduct as much business as possible in places where regulators and regulations are weaker.”

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