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.
Global regulators have sought to bolster oversight of the swaps market after largely unregulated trades helped fuel the 2008 credit crisis and led to the rescue of American International Group Inc., a U.S.-based insurer that booked large amounts of swaps trades in Europe.
While the EU has long sought a system of so-called “equivalence,” where it accepts that U.S. rules are equally rigorous as its own, and allows U.S. banks to comply only with their domestic requirements, the CFTC had resisted such an approach.
The over-the-counter derivatives market “needs a consistent and coordinated approach from regulators, if it is to work effectively,” David Myers, financial services consulting partner at Deloitte LLP in London, said in an e-mail.
“The approaches used by regulators in the U.S. and EU are highly similar in improving transparency, reducing systemic risk, promoting financial stability and combatting market abuse,” he said.
The CFTC has been putting in place new rules required by the Dodd-Frank Act designed to have most swaps guaranteed at clearinghouses that accept collateral from buyers and sellers to reduce risk. Gensler had proposed that the rules apply to many trades that currently are booked outside the U.S.
Today’s deal affects how the U.S. and Europe will apply rules to banks including Barclays, JPMorgan Chase & Co. and Citigroup Inc. The CFTC said that the agreements will be reflected in decisions it will take tomorrow on applying swaps rules to overseas-based firms. It will also be incorporated into an EU review of how well U.S. swaps rules measure up to its own standards.
While the accord settles some aspects of how swaps rules will apply cross-border, and averts the crisis that would have been provoked by tomorrow’s deadline, further negotiations on a range of issues will be needed.
Regulators have yet to agree on what access authorities should have to overseas-based firms’ data, “and other issues related to privacy, blocking, and secrecy laws,” the CFTC and EU commission said. Negotiations will also continue to address differing EU and U.S. requirements for the minimum collateral clearinghouses must hold to ensure they can survive market turmoil.
Further talks will also be needed on the conditions under which a new type of trading platform being developed by the EU, known as an Organized Trading Facility, will be allowed to offer services to U.S.-based firms.
The EU is still discussing the legislation that would underpin OTFs, which would perform a similar function to U.S. swap execution facilities. The CFTC and EU said they would review the compatibility of their respective rules in January, putting pressure on EU lawmakers to complete a deal on the bloc’s law, known as Mifid, by the end of 2013.
“Both sides aim to conclude these discussions as soon as possible,” the agencies said in their joint statement.
Mark Carney, chairman of the Financial Stability Board, has said that the FSB will report to the Group of 20 nations in September on efforts by regulators to resolve “outstanding cross-border issues” for swaps regulation, “including gaps, overlaps and inconsistencies.”
The FSB brings together regulators, central bankers and finance ministry officials from the G-20.