Regulatory arbitrage?

EU delays U.S. swaps decision

Banks using U.S.-based clearinghouses to handle their swaps trades are set to win a reprieve from tougher capital rules as the European Union said it will take more time to assess whether American regulations are strict enough.

Michel Barnier, the bloc’s financial-services chief, will seek permission from the 28 EU governments to postpone by six months a deadline to decide on whether U.S. rules for clearing of swaps are as tough as EU standards. Under the current timetable, the European Commission must take a positive decision by June 15 or banks would have to back swap trades cleared through U.S. platforms with more capital.

Barnier has received a letter on this issue from Scott O’Malia, a Republican commissioner at the U.S. Commodity Futures Trading Commission, warning that failing to address the deadline could ultimately lead to “market fragmentation and contractions of liquidity,” Chantal Hughes, a spokeswoman for Barnier, said in an e-mail. “We have been working on the matter for some time and agree with him that we want to avoid such consequences,” Hughes said.

The European Commission and CFTC have repeatedly clashed over the scope of their rules for the $693 trillion market for swaps and other over-the-counter derivatives, as regulators seek to plug loopholes exposed by the 2008 financial crisis.

In the EU, the Brussels-based commission is empowered to decide if another nation’s rules are up to scratch. These so- called equivalance decisions have implications for market access and other requirements. Firms based in countries that are judged equivalent can in some cases access the EU market without having to expressly comply with EU regulations, because their domestic rules are as strong.

Too Far

The CFTC has faced criticism from the EU and Japan for adopting rules that other nations say reach too far beyond U.S. borders and leave their banks and investment firms facing overlapping rules.

The EU commission will “continue to work with regulators from the U.S. and other juridictions” on mutual rule recognition, Hughes said.

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