European Commissioner Barnier on U.S.-EU Cooperation [or the Lack Thereof] (with Lofchie Comment)

European Commissioner Michel Barnier, responsible for Internal Market and Services, delivered a speech at the Transatlantic Finance Initiative in New York. Commissioner Barnier discussed the progress of his recent discussions with the Fed, Treasury and the Regulatory Agencies in Washington.According to Commissioner Barnier, international standards are largely agreed upon in a few areas, including (i) margin on derivatives, (ii) shadow banking and (iii) the regulation of systemically important banks. However, he was critical of U.S. regulation in a number of areas, including what he described as "the slowness of the U.S. in moving towards internationally agreed accounting standards." On the regulatory side, he warned that "Expanding interpretation of home-grown rules to transactions that are already covered by equally solid foreign rules will only lead to legal conflicts." He then went on to say that regulatory differences between the U.S. and the EU are "unnecessary, costly and ultimately undermine efficient control and supervision."

Lofchie Comment: I take what Commissioner Barnier says as extremely important, not just to the direction of EU financial regulation, but also to the potential direction of U.S. regulation. When in 2012, the CFTC proposed that it would aggressively assert jurisdiction over non-U.S. banks entering into swaps, Commissioner Barnier issued a letter in which he threatened a response against U.S. banks and the possibility of a trade war. (He was, of course, not the only non-U.S. regulator who criticized the CFTC's position at that time, but he was the most direct.) Since then, the CFTC has much backed off this expansive view of its jurisdiction, but only temporarily (pursuant to what the CFTC describes as "time-limited" no-action relief). Now Commission Barnier repeats his warning that the U.S. and Europe must cooperate in financial regulation - particularly the regulation of derivatives - or else there will be bad consequences. It may seem obvious that U.S. and EU co-operation is a good thing, and that the U.S. regulators should cooperate with the EU by, for example, trusting the EU to regulate the conduct of the European banks conducting swaps activities. However, this obvious solution has an underlying problem, a very big problem. The U.S. regulation of swaps is extraordinarily onerous, I think irrationally so; and I think that swaps customers (not just swaps dealers) will find it an unattractive form of regulation. As a result, if U.S. swap dealers operate and compete under U.S. rules, and EU swaps dealers operate and compete under EU rules, then the EU swaps dealers will be competing on favorable terms and the U.S. financial institutions will be damaged, along with the U.S. economy. What this means is that, if the U.S. is going to cooperate with the EU in developing financial regulation, then the U.S. is going to have to substantially rework its derivatives regulations so that U.S. firms have some chance of competing for business on even terms. I am very much hoping that our government - Congress and the regulators - takes up Commissioner Barnier's offer of cooperation, tied as it is to a warning of a hostile European response, and rethinks the direction of our financial regulations.

View speech in full here (links externally to Europa website).