Streetwise Professor Craig Pirrong on Clearing Rule Conflict between United States and EU (with Lofchie Comment)

In on-line commentary, University of Houston finance professor Craig Pirrong discussed the ongoing conflict between the United States and EU regarding derivatives regulatory policy, and the consequences of the United States and EU not accepting each other's clearing rules as equivalent.

According to Mr. Pirrong, what makes this issue especially pressing is the upcoming December 2014 deadline for the EU to recognize U.S. central counterparty clearing houses ("CCPs") as equivalent. Mr. Pirrong stated that, if this does not happen, European banks that use a U.S. CCP will face a substantially increased capital charge on the cleared positions.

Mr. Pirrong further explained that this "game of chicken going on between the EU and U.S." could lead to the world derivatives market becoming more fragmented and therefore less competitive – an outcome that is "cruelly ironic," according to Mr. Pirrong, given that previous CFTC Chairman Gary Gensler claimed his regulatory agenda would make the markets more competitive. Mr. Pirrong went on to note that EU Commissioner Michel Barnier's recent statement approving the CCPs of five countries outside the EU, but not including the U.S. CCP, can be read as "a giant one finger salute from the EU to the CFTC."

Mr. Pirrong concluded that the United States and EU are "fighting over control," and that the outcome will be a more fragmented and less competitive and robust financial system.

Lofchie Comment: In his usual impolitic style, Professor Pirrong makes the point that the CFTC's drive for more global regulatory power is meeting the countervailing force of non-U.S. regulators who see no reason to defer to the CFTC. It was entirely foreseeable that the CFTC would be unlikely to persuade the European financial regulators to concede to CFTC authority over European firms. Accordingly, the CFTC has put itself in the position where it must either retreat (the rational thing to do) or potentially damage the U.S. economy. As Professor Pirrong warns, the CFTC is risking an outcome whereby the world will divide up into economic zones, with the end result both a smaller world economy and one in which the role of U.S. financial institutions is confined to the U.S. zone. When U.S. regulators increase the scope and demands of U.S. regulation without consideration from other regulators or market participants, it should come as no surprise when non-U.S. regulators push back.

See: "What Gary Gensler, the Igor of Frankendodd, Hath Wrought," Streetwise Professor. Related news: EU Commissioner Barnier to Accept Clearing Rules from Five Countries outside EU, but Not the United States (with Lofchie Comment) (June 30, 2014).