The United States is coming to be seen as a global threat, acting unilaterally with aggressive new market rules that critics say will hurt US firms, foreign banks, and international markets in one swoop.
The new buzzword in the financial world is "extraterritoriality", or ET. The idea that a government can exercise its authority beyond its borders.
The fear is that after the 2007-2009 financial crisis that roiled global markets, some countries will engage in an arms race of tough financial reforms in order to be seen as the safest capital markets, and will haphazardly foist their own rules on other nations.
Despite its talk of a global level playing field, the United States is being portrayed as a rogue country, with its unmatched Volcker rule to curtail banks' risky trades and its accelerated timetable to put in place new derivatives reforms.
The backlash has gained force in recent weeks.
International finance ministers are taking up their concerns with the US finance bosses, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.
"At this time of financial market stress, I want to ensure this regulatory dialogue supports cooperation aimed at minimising any unintended consequences of regulatory reforms on either side of the Atlantic," UK Finance Minister George Osborne wrote to Bernanke late last month.
Japan and Canada also fear that unless non-US firms are exempted from the Volcker rule, trading in their own government bonds would be crimped.
EU financial services chief Michel Barnier is expected to raise the Volcker rule issue with Geithner this month.
To be sure, the EU has its own unmatched aggressive reforms. They include harsh proposals for credit raters, hedge funds, and its MiFID law that would only let non-EU firms do business in the bloc on condition that their home rules are equivalent to EU rules and that they offer reciprocal market access rights.
The unprecedented volume of new rules across the world has made overlaps inevitable but unwinding them may not be easy or so fast.
"Extraterritorial stuff is causing trouble, slowing things down. Many are now waking up to the Volcker rule but it would need Congress to change legislation," said an international regulatory official, who could not speak on the record due to political sensitivities.
David Lawton, acting director of markets at the UK Financial Services Authority, said last week that it would take "years and years and years of analysis" for regulators to determine if regimes are equivalent.
US firms are also chafing at what they see as overly tough domestic derivatives proposals that do not have enough extraterritorial reach to ensure their foreign rivals don't get the upper hand.
"I would call it a competitive nightmare," said one attorney at a Wall Street bank who was not authorized to speak on the record. "In Europe, the US banks are going to be on the Dodd-Frank playing field, and European banks are going to be on a very different playing field, which is much less tilted against them."
Efforts by the Group of 20 leading economies to shine a light on a $700 trillion derivatives market that magnified problems at collapsed bank Lehman Brothers and AIG, the US insurer that had to be rescued, are also stoking concerns about regulatory overreach despite strenuous efforts by EU and US regulators to avoid this.
The United States is roughly a year ahead of Europe on its new derivatives framework, with Asia significantly lagging behind with its own reforms.
The European Union is annoyed its central banks won't be exempt from derivatives clearing requirements in the United States. The outcome is that the Fed is unlikely to be exempt from the bloc's derivatives requirements in a similar fashion.
And while the EU and United States are engaged in hand-to-hand combat, Asia is left watching from the sidelines, causing both confusion and a risk of capital flight.
"Multinational banks out in Asia are entitled in some ways to feel like ducks in a shooting range," said Alan Ewins, a partner at Allen & Overy lawfirm in Hong Kong.
But the emerging uneven regulatory framework already has banks thinking about setting up vehicles to book business in Asia to avoid EU and US rules, said Chris Bates, head of financial services at Clifford Chance law firm in London.
Last week, Geithner held a press conference and acknowledged the extraterritoriality tensions.
He warned other nations not to adopt rules that are softer in order to poach business from US markets, while also saying regulators need to figure out a sensible way to apply disjointed rules.
"And because in some areas US reforms are tougher or just different from the rules forthcoming in other markets, we need to figure out a sensible way to apply those rules to the foreign operations of US firms and the US operations of foreign firms," Geithner told reporters on Thursday.
Also on Thursday, the US Commodity Futures Trading Commission and the US Securities and Exchange Commission released a report saying that there may be kinks to work out with international derivatives reforms.
The 153-page report said, "It is still too early to determine precisely where there is alignment internationally and where there may be gaps or inconsistencies."
In a dissent to the report, Republican CFTC commissioner Scott O'Malia said while there is global coordination, "significant questions remain regarding the extraterritorial application of the specific rulemakings currently underway at the Commissions."
"Further, significant questions remain regarding the pace of rulemakings among the various regulatory bodies going forward," he said.
International market players welcomed Geithner's remarks and the CFTC-SEC report as an encouraging sign that the United States is officially recognizing that something must be done about the dangers of inconsistent reforms.
"The CFTC paper shows that people are waking up to the issues of extraterritoriality, and throwing the burden back to the Financial Stability Board to create common standards," said Alex McDonald, chief executive of the Wholesale Markets Brokers' Association based in London.
The FSB is the G20 regulatory task force charged with implementing pledges to reform banks and markets after the financial crisis.
"It's finally a recognition you need a way of recognizing each other's rules and it's the first time I've seen this recognized formally," McDonald said.