Foreign and U.S. banks warned lawmakers on Wednesday that broad application of U.S. swaps rules could undermine U.S. competitiveness abroad, increase the cost of hedging and even provoke brinkmanship among international regulators.

The 2010 Dodd-Frank law, which aims to curb excessive risk-taking on Wall Street, gives the Commodity Futures Trading Commission new oversight powers for the opaque $700 trillion derivatives market.

That includes broad authority to regulate any swaps activities overseas so long as it has a direct and significant impact on U.S. commerce.

The CFTC has been mostly silent on the reach of its new swaps rules.

But concern over swaps jurisdiction gained momentum last April when banking regulators proposed a rule on margin and capital for uncleared swaps that appeared to impose tough Dodd-Frank rules on U.S. bank branches in other countries, while exempting their foreign competitors.

Such a framework would eviscerate our ability to serve clients overseas and cede the global market to foreign competitors who would not be subject to these rules, Don Thompson, managing director at JPMorgan Chase & Co, told a House Financial Services subcommittee hearing.

Thompson posed the case of a French pension fund, which would not have to post margin if it entered into a swap transaction with a European or Asian bank. If Dodd-Frank requires U.S. banks to seek collateral from the same pension fund, we will simply lose this business.

New Jersey Republican Scott Garrett, chairman of the capital markets subcommittee, echoed Thompson's concerns, saying firms still lacked clarity on the rules' scope.

Uncertainty hurts growth and it stifles investment, said Garrett who has cosponsored a bill with Connecticut Democrat Jim Himes to define and curb the application of U.S. swaps rules.

The bill would require all swaps to be reported to a central data repository, but exempt swaps between foreign branches of U.S. banks and foreign counterparties from some Dodd-Frank regulations.

It would also allow foreign branches of U.S. banks to comply with local capital requirements instead of U.S. rules, as long as the countries were party to the Basel international banking accords.

Despite the bill's bipartisan support, some subcommittee Democrats expressed skepticism.

If you need an example of how this bill would increase systemic risk to the American economy, look no further than AIG, said Massachusetts Democrat Stephen Lynch.

Mega-insurer American International Group's risky bets, many of which were booked abroad, aggravated the 2007-2009 financial crisis and led to a massive taxpayer bailout.

Lynch said many major U.S. banks book their swaps overseas. By letting those banks' foreign branches avoid the bulk of U.S. swaps rules, you are planting the seeds for the next crisis, he said.

OVERLAP AND CONFLICT

Chris Allen, managing director at Barclays Capital, warned that a broad application could lead to overlapping or even conflicting regulation from foreign regulators, who could be tempted to retaliate against broad U.S. rules, by applying their own rules in a far reaching way.

This could result in reciprocal foreign regulatory oversight in U.S. markets, said Allen.

Allen argued that foreign banks may spin off subsidiaries or refuse to trade with U.S. counterparties, in a bid to escape the rules.

That could raise the cost of hedging and make it harder for end-users - such as energy firms, farmers and airlines - to access global markets.

At a time when U.S. regulators already must make difficult trade-offs to regulate domestic markets effectively, making them responsible for ensuring compliance with... U.S. rules in the context of wholly foreign transactions... raises serious concerns Allen said in his written testimony.

Both Allen and Thompson support the Himes-Garrett bill.

(Reporting By Alexandra Alper; Editing by Tim Dobbyn)