U.S. and European Union financial regulators broke a deadlock over rules for the $633 trillion global swaps market, saying the deadline-beating accord will protect banks from overlapping requirements and extra costs.
The U.S. Commodity Futures Trading Commission and European Commission said the deal will allow banks to comply with only one set of standards for some aspects of swaps trading, while staving off the threat that EU-based clearinghouses could be cut off from the U.S. market. Negotiators clinched the accord one day before temporary exemptions from U.S. rules were set to expire, threatening market upheaval and a regulatory clash.
“We’ve taken another significant step in our mutual journey to bring transparency and lower risk to the swaps market worldwide,” CFTC Chairman Gary Gensler said in a statement with Michel Barnier, the EU’s financial services chief.
The international reach of CFTC swap-trading requirements has been one of the most controversial elements of the U.S. agency’s Dodd-Frank Act rules, prompting opposition from financial companies including Goldman Sachs Group Inc. and Barclays Plc. The CFTC has faced criticism from European and Asian regulators for overreaching its authority.
Failure to reach a deal could have led to “conflicts of law, inconsistencies, and legal uncertainty,” the CFTC and European Commission said in the joint statement. The agencies are “leading by example and invite other countries to join this approach.”
Under today’s deal, the CFTC agreed to accept some EU rulemaking as “essentially identical” to U.S. standards, which will allow companies to apply only the rules of the jurisdiction where they are based. The concessions include rules on how traders should settle disputes over the valuation of derivatives contracts, and risk-mitigation requirements.
“Many had doubts about achieving greater global financial regulatory harmonization, but this demonstrates heavy-duty headway is being made,” Bart Chilton, a Democrat on the CFTC, said in a statement.
The CFTC also agreed to extend until the end of this year a deadline of tomorrow for EU-based clearinghouses to register with U.S. regulators. This will safeguard U.S. market access for EU-based clearinghouses, such as Deutsche Boerse AG’s Eurex Clearing and also LCH.Clearnet Group Ltd.
The original deadline posed a direct threat to the EU, as trades involving U.S. firms would have shifted away from European platforms to U.S.-based ones that comply with CFTC rules.