CFTC Commissioner Giancarlo Calls for Reset in EU and CFTC Cross-Border Regulatory Relationship (with Lofchie Comment)

In a speech before the Global Forum for Derivatives Markets, CFTC Commissioner J. Christopher Giancarlo warned of a looming "trade war" over swaps market clearing and execution if the European Union and the CFTC do not harmonize their cross-border regulatory positions.

First, Commissioner Giancarlo detailed an "uncoordinated approach to swaps clearing," arguing that the European Commission's reluctance to recognize U.S. central counterparties as equivalent under EMIR could precipitate an outcome that "will be destructive to both U.S. and European economic interests and lead to further market fragmentation and contraction of liquidity, market disruption and dislocation in the global derivatives markets."

Commissioner Giancarlo stated his belief that the CFTC began the "current rift" in cross-border swaps cooperation with its July 2013 "Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations" and its subsequent "Staff Advisory," (i.e., CFTC Letter No. 13-69) the combined purpose of which is "to dictate that non-U.S. market operators and participants must abide by the CFTC's peculiar, one-size-fits-all swaps transaction-level rules for trades involving U.S. persons or supported by U.S.-based personnel."

Commissioner Giancarlo argued that these CFTC trading mechanics "do almost nothing to reduce counterparty risk," and that "the prescription is unrelated to the prevention of the disease." According to Commissioner Giancarlo, the CFTC approach has fragmented the markets into separate trading and liquidity pools between those in which U.S. persons are able to participate and those in which U.S. persons are "shunned."

Commissioner Giancarlo stated that he believes that, under Chair Massad, the new CFTC staff is increasingly pragmatic and sensitive to global concerns, but said that there is more to be done. He stated that he intends to do anything he can to encourage the CFTC to replace its cross-border Interpretive Guidance with formal rulemaking that "recognizes outcomes-based substituted compliance for non-U.S. regulatory regimes," as well as the withdrawal of the CFTC Staff Advisory (which is currently on hold pending the expiration of further time-limited no-action letters), which he said "contradicts the conceptual underpinnings of the CFTC's Interpretive Guidance." He also said that Chair Massad and EC Vice President Barnier continue to have a productive dialogue about streamlining the harmonization of regulatory requirements for CCPs registered by both the CFTC and a European authority.

Lofchie Comment: In response to Commissioner Giancarlo's concerns regarding problems with the global economy and the European economy, I can only emphasize the material damage they may be doing to the U.S. economy and to jobs in the United States. When, in Commissioner Giancarlo's words, "U.S. persons are shunned," it means that U.S. entities either do not have the ability to compete for business or, if they do, must shift their relevant activities (and jobs) overseas.

See: Commissioner Giancarlo's Speech.
Related news: FIA Interviews CFTC Chair Massad Regarding CFTC's Agenda (September 23, 2014); EU Commissioner Barnier Seeks U.S. Swaps Deal (with Lofchie Comment) (September 15, 2014); EU Commissioner Barnier to Accept Clearing Rules from Five Countries outside EU, but Not the United States (with Lofchie Comment) (June 30, 2014).