Keynote Address: CFTC Commissioner J. Christopher Giancarlo The Global Forum for Derivatives Markets (35th Annual Burgenstock Conference) Geneva, Switzerland
The Looming Cross-Atlantic Derivatives Trade War: “A Return to Smoot-Hawley”
Hello ladies and gentlemen. Thank you for your warm welcome. It is a pleasure to be with you today.
Thank you, Walt, for your kind introduction. I am honored to give this keynote address.
Let me start by saying that my remarks reflect my own views and do not necessarily constitute the views of the Commodity Futures Trading Commission (CFTC), my fellow CFTC Commissioners, or of the CFTC staff.
￼Today marks the fifth anniversary of the Pittsburgh G-20 Summit. At that critical meeting a year after the financial crisis, global leaders agreed to work together to support economic recovery through a “Framework for Strong, Sustainable and Balanced Growth.”1 The G-20 leaders agreed upon three fundamental principles2 for over-the-counter (OTC) derivatives markets: One, when possible, trading all standardized OTC derivative contracts on regulated trading platforms; Two, moving many bilateral swaps to central counterparties (CCPs) for clearing; and Three, reporting swap trades to trade repositories.3 To achieve these common goals, the Pittsburgh participants pledged to work together to “implement global standards” in financial markets, while rejecting “protectionism.”4
So here we are today, five years after Pittsburgh at this important gathering of major participants and regulators in the global derivatives markets. Let us ask ourselves: Are we fully honoring the commitment to coordinate our efforts to reform the derivatives markets? Are we avoiding protectionism? Or are we, in fact, building ￼new 21st century protectionism around regional financial markets, especially in swaps and futures?
￼I am afraid many of you, based on your participation in the markets, already know the answers to those questions, and they do not inspire confidence for the future. But let us examine the state of each common goal from that G-20 summit in Pittsburgh.
Let’s start with the uncoordinated approach to swaps clearing.
The CFTC was one of the first regulators of the G-20 to implement clearing mandates. The CFTC also adopted the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMIs) last year.5 The CFTC patterned its swaps clearing rules on its rules for clearing futures that have worked successfully for decades.6 The CFTC’s rules do not require that swaps clearing take place in the United States, even if the swap is in US dollars and between US persons. But the CFTC does require that swaps clearing take place on a CFTC-registered and supervised clearinghouse or CCP that meets core principles and basic standards, including the IOSCO PFMIs.
In spite of these steps by the CFTC, the European Commission (EC) has not recognized US CCPs as equivalent under the European Market Infrastructure Regulation (EMIR), as it reportedly plans to do for CCPs in India, Japan, Hong Kong, Australia and others.7 As you know, if the EC does not recognize US CCPs as equivalent, they will not qualify as “qualifying” CCPs for purposes of Basel III risk- weighting for banking institutions. This will make it cost-prohibitive for EU banks to clear through US CCPs, which will be unable to maintain direct clearing member relationships with EU firms and will be ineligible to clear contracts subject to the EU clearing mandate next year.
Needless to say, this outcome will be destructive to both US and European economic interests and lead to further market fragmentation and contraction of liquidity, market disruption and dislocation in the global derivatives markets.
Yet, this lack of coordination in swaps clearing does not exist in a vacuum. It is preceded by an uncoordinated approach to regulation of swaps trading.