Standoff Continues Between US and Europe on SWAPs

Even as the current Commodities Futures Trading Commission head finishes his term, the issue of swaps equivalence is still not resolved.

Christopher Giancarlo, the Chair of the CFTC, appeared in front of the House Agriculture Committee, the Sub-committee on Commodity Exchanges, Energy, and Credit.

Giancarlo is about the finish up his term as the Chair with Heath Tarbert will take over.

While the hearing was not technically a farewell, it was at times treated as such. Giancarlo mentioned LabCFTC and Project KISS, both initiatives started while he was chair. He also mentioned the continued drama over equivalence and deference in swaps regulations.

J. Christopher Giancarlo
CFTC Chairman J. Christopher Giancarlo

Giancarlo first mentioned this issue in the summer of 2017. With Brexit, Giancarlo has stated, European regulators were trying to do something unprecedented. Not only did they want to power to regulate and approve swaps transactions in London, but possibly in the US as well.

This, in Giancarlo’s view, violated the agreement made by global regulators at the G20 Summit in Pittsburgh in 2010 at which global regulators agreed to a set of principles- referred to as equivalence- but with equivalence came deference- meaning global regulators would not try and micromanage swaps transactions conducted outside their borders.

The European Union recently passed EMIR 2.2 and at the hearing, Congressman David Scott, a Democrat from the State of Georgia, painted a nightmare scenario.

“There’s this new EU law that’s bubbling up. It’s called EMIR 2.2., which could have major effects on our United States clearing houses, potentially setting up the EU as a primary regulator over our United States clearinghouses. This is a problem, and our US clearinghouses- in addition to that- may even be required to fund ESMA, the EU regulator of all EU finance through surcharges, just for the privilege of their regulating us. I’m hoping that you will tell me that I’ve got it all wrong,” Scott said.

But Giancarlo said Scott was correct. “I wish I could tell you, you’ve got it wrong, but you’ve got it right and to some degree you don’t even know how right you have it,” Giancarlo answered, “It assigned to a European body based in Paris called ESMA that you referenced oversight over non-European clearinghouses, including potentially American ones, but deemed them to be unqualified to regulate European ones. So, they have the capacity not to regulate European clearinghouses but to regulate non-Europeans ones. It’s completely on the geopolitical realm.”

ESMA is the European Stock and Markets Authority. Giancarlo said that while EMIR 2.2. has passed the European parliament the specific rules are being written and so it’s still not clear exactly what effect- if any- this law will have on swaps cleared in the US.

Though Giancarlo is set to leave, hi successor, in his confirmation hearing, made clear that the US policy remains the same.

“I want to be very clear on this. I agree with you wholeheartedly, that our clearinghouses and exchanges need to be exclusively supervised and regulated by US regulators.” Dr. Tarbert stated. “Again, I go to the very point that you raised, that it’s very important that the United States have the jurisdiction and sovereignty to regulate its own markets.”

This is a position not only held by the CFTC, but it is a bi-partisan one.

Just as Scott, a Democrat, made clear that the US will not stand for foreign regulators determining US swap transactions, Republicans feel exactly the same way.

When Giancarlo testified in front of the same committee in 2018, it was Republican Mike Conaway who chaired the committee, and he too noted his support for global equivalence and deference when asking Giancarlo about this same issue.

For Europeans, regulating US swap transactions makes sense since a swap cleared in the US has an effect on swaps cleared in Europe, especially if the same clearing house is clearing in both the US and Europe.

For the US, it is a matter of sovereignty. US transactions should be overseen by US regulators only.

“We are rule makers, not rule takers,” Giancarlo has previously stated.

Furthermore, as Giancarlo has noted repeatedly, it violates the agreement set in Pittsburgh, which was that global regulators agreed on a set of principles to guide all regulators but also agreed that to defer, as a result, to each regulator to handle oversight in their country.

When Giancarlo testified in 2018, he described something akin to a financial Armageddon if this issue is not resolved.

Here is part of a 2018 article in The Industry Spread.

’Europe would come to us.’ Giancarlo said, ‘Our law has to apply to your clearinghouses. I would say ‘Look, under our Constitution that’s just not going to happen.’

Giancarlo then described a global financial nightmare: ‘Their next step would be to tell European firms not to use our services.’

“Giancarlo said that would hurt European firms more than US clearinghouses because many products- like dollar interest rate futures- only trade on the CME and ‘European hedge funds need to use those products.’

“’If they continue to press this issue, it’s their (European) firms that will be hurt the most.’ Giancarlo concluded.”

The stakes are in the hundreds of trillions of dollars.

In his opening statement, Scott said that the total nominal value of US swaps is a staggering $282 trillion.