US-EU clearing spat is out of control, cooler heads must prevail
A high stakes game of chicken is taking place between US and European regulators, with the spectre of fragmentation in derivatives markets looming. But there's been no proper dialogue between the two sides.
The chairman of the US Commodity Futures Trading Commission (CFTC), Christopher Giancarlo, has shouted from the rooftops his message of regulatory deference — encouraging a system where home regulators defer supervision of derivatives markets to each other, minimising duplicative oversight of crucial market infrastructure.
He has tried everything — op-eds in two newspapers, speeches in various forums, and even a colourful Frankenstein metaphor comparing regulators and policymakers to villagers banding together to fight the Frankenstein monster that was the 2008 crisis.
But he seems to be wasting his breath, as European policymakers go ahead with proposals that amend the powers of bodies such as the European Securities and Markets Authority (ESMA), the pan-European securities regulator, to give European regulators increasingly stringent oversight of foreign financial institutions.
Clearing houses have become the focal point for the fight, as new European rules could force 'foreign' CCPs clearing euro derivatives to relocate to the continent following the UK's departure from the European Union. Rules that push more derivatives to be cleared by these central counterparties have made them critical to the transparency and success of derivatives markets.
Giancarlo has condemned the “highly prescriptive and rules-based” approach favoured by the European Union, advocating for a more open, principles-based system of oversight.
The chairman has also warned that a 2016 equivalence agreement on supervision of CCPs signed by the two jurisdictions could be jeopardised if the EU acts unilaterally.
Neither side is budging on the issue, and this should worry market participants and regulators alike.
It should worry market participants, because regulatory uncertainty and conflicting visions between the two jurisdictions will only cause fragmentation and higher prices to customers. It should worry regulators, because the vision of coordinated regulation agreed by policymakers at the 2009 G20 meeting in Pittsburgh seems to be rapidly unraveling, with regulatory arbitrage set to rear its ugly head again.
GlobalCapital sources have feared for some time that relations between the two jurisdictions on this issue are breaking down, and the constantly escalating language from the CFTC seems to confirm these assertions. Giancarlo’s recent trip to the continent has clearly not allayed his concerns.
The new CFTC is evidently very different from the body the European Union had gotten used to dealing with after 2008. With that in mind, Giancarlo should be understanding and flexible with the Europeans, especially when considering the thorny problems that Brexit is likely to raise.
But the European Union should reciprocate this flexibility in kind, and open proper dialogue with the CFTC. The recent equivalence agreement between the two jurisdictions shows that regulatory harmony is still possible.
Derivatives markets are undoubtedly safer and more transparent than they were before the crisis. It would be a great shame to let this progress go to waste.