While Commodities Futures Trading Commission (CFTC) and European Commission regulators are largely harmonized, much work remains to be done on the issue of margin requirements.
CFTC chairman J. Christopher Giancarlo had these words for attendees at the Eurofi Financial Forum in Tallin, Estonia on September 14, 2017:
Productive work continues between the US and Europe on comparability analyses of margin and trading requirements. Success is critical. Otherwise, many firms operating in the EU could be required to comply with US and European rules concurrently at enormous cost and economic inefficiency.
Eurofi is a platform for exchanges between the financial services industry and the public authorities addressing issues related to the evolution of financial regulation and supervision and the economic and monetary context impacting the EU financial sector. And Giancarlo’s speech was yet another in his current European tour to focus on swap reform.
Earlier in the week, Giancarlo published an opinion piece in the French newspaper Les Echoes supporting deference to foreign swap dealer compliance; he also made a speech in Switzerland on the future of global swap regulation.
In general, Giancarlo has been touting the harmonization of regulation in the global swaps market, which had its nexus in the 2009 G20 Summit in Pittsburgh, Pennsylvania agreement.
European derivative regulators use central counterparty clearing houses (CCPs) to help facilitate trading done in European derivatives and equities markets and to provide efficiency and stability to the financial markets in which they operate.
Giancarlo is calling for deference for global swap dealers, i.e., if a foreign swap dealer has satisfied the rigorous demands of the regulator in one country – the Finance Conduct Authority in England, the Australian Securities and Investment Commission in Australia, the Securities and Futures Commission in Hong Kong, etc. – the dealer should be fast tracked to approval from the CFTC.
Giancarlo said that in general this has reduced or eliminated compliance:
The substituted compliance regime permits these CCPs to comply with certain CFTC requirements for financial resources, risk management, settlement procedures and default rules and procedures by complying with the corresponding EMIR requirements. The substituted compliance framework also contains a streamlined registration process for EU-based CCPs that apply for CFTC registration.
But on the issue of margin there are still too many differences between the CFTC and EC regulators for harmonization.
To illustrate the point, Giancarlo referred to a no-action letter issued by the CFTC February 1:
Accordingly, on February 1, CFTC staff issued no-action relief from compliance with the CFTC margin rules for swap dealers that comply with margin requirements under EMIR. This relief was necessary to provide an opportunity for CFTC and EC staff to complete their assessments and to secure the issuance of the requisite comparability and equivalence determinations.
Giancarlo ended his speech by asking rhetorically whether global regulators would reciprocate deference to the CFTC:
The EC has recently proposed amending its recognition framework under EMIR for third-country CCPs. I understand that most attention has been on whether UK CCPs should have to re-locate to the EU after Brexit. Yet, the real importance of the proposal to the CFTC is whether the EU will seek to exercise direct oversight over third-country CCPs – including those in the United States.